Irish consumers are facing an annual increase in the cost of living of as much 3.2 per cent, well above what would be indicated by the consumer price index, according to the Central Bank.

At the presentation of its Spring Bulletin yesterday, the Central Bank also issued warnings about increases in wages and house prices rises, as well as about the dangers associated with investing in commercial property.

But its assertion that consumers are facing a larger rise in the cost of living than indicated by the traditional consumer price index look likely to have implications for the next Partnership Agreement.

The method suggested by the bank of measuring inflation - based on the price increases measured in the national accounts - is much broader than the simple consumer price index, which amongst other things excludes the rising cost of housing and includes falling interest rates. According to the Central Bank, the figures based on the price increases in the national accounts is a more comprehensive figure than the CPI. The measure takes into account personal consumption price rises, as well as making an allowance for house prices increases. It now may be used as a basis by the Social Partners during the negotiations for the next national wage agreement.

According to Dr Michael Casey, the bank's assistant director general, the consumer price index, the traditional measure of inflation, tends to "flatter" the economy. It is running at about 2 per cent, according to the Central Bank. However, it is expecting the consumer price index to average 1.5 per cent in 1999, with a fall towards 1 per cent before June, with a sharp pick up in the second half of the year. Not including mortgage interest rate cuts - in line with the practice in other EU countries - it is predicting a rate of some 2.2 per cent, which is in line with the European Commission's latest forecast.

However, the real level of overall price rises in the economy was 4.5 per cent in 1998, according to the Central Bank, and is expected to fall to 3.35 per cent this year. This includes the rising cost of building and other factors relevant to business, such as the rising cost of industrial plant machinery. When all item which do not relate to consumers are taken out, the rate of increase falls to around 3.2 per cent for both this year and last. This is likely to be the best available measure of the rising real cost of living in Ireland.

Dr Casey also said he was "very worried" about house price inflation and the danger that it could fuel higher wages, or even deter people from moving to high price areas to take up employment. He pointed out that wages are growing at 6.5 per cent, or about three times the European average, which is a "cause for concern". Wage increases in sectors such as construction and the public sector are highlighted as particular causes for concern.

The bank also issued a warning about the dangers of investing in some commercial properties, particularly shopping malls and hotels. "There is a danger that some investors are assuming continued high rates of growth and low interest rates will continue. We are concerned that a lot of these investments could come unstuck somewhere down the line," Dr Casey said.

However, despite these warnings, the Irish economy is in "amazingly good shape". He added that it is impossible to have a successful economy without some side effects. The main focus, he said, must be on maintaining competitiveness in the light of the strong growth in wages.

The bank set out five key factors which must be met to maintain competitiveness. These mean that the business climate must be right and there must be an adequate reward for risk takers.

In addition, the education and skills of the labour force and good social conditions are crucial while individual firms must invest in research and development, marketing and after sales services.