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December's Consumer Price Index dropped 0.1%, bringing 2001 annual inflation to 1.4%. Projections had been that the December CPI would drop 0.2%. The change in the index stems primarily from a 2.5% drop in vacation prices, a 2.5% drop in gas prices and a 2% drop in produce prices. In contrast, footwear prices rose a sizeable 3%.

Annual inflation, net of produce, rose 1.2%, however, net of housing prices, which gained 5.2% in 2001, the index rose just 0.4%. Net of both items, annual inflation last year was just 0.1%.

Bank of Israel's inflation target for the year had been 2.5%-3.5%. This is not the first time Bank of Israel has missed its inflation target. The 1999 target was 4%, while reality was a mere 1.3%. In 2000, the central bank aimed for 3-4%, while actual inflation was 0%. In 2002, the bank projects a 2-3% inflation rate.

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