With inflation running at a higher rate here than elsewhere in the euro zone, the heat is on the Government, writes Laura Slattery

The Government was criticised for not doing enough to keep inflation under control yesterday by business groups and Opposition parties.

The annual rate of inflation rose by more than expected to 4.2 per cent, according to figures released by the Central Statistics Office (CSO).

This was despite the fact that July sales usually lead to a fall in the consumer prices measured by the Consumer Price Index (CPI).

Fine Gael finance spokesman Richard Bruton said the inflation figures confirmed that not only is Ireland the most expensive country in the euro-zone, but that prices are rising faster here.

The Government seems indifferent to "dangerous signs of fragility" in the economy and the exposure of families to an overpriced property market, he said.

"Clearly this is not the time for the Government to be stoking up spending in the economy, but that is exactly what it is doing."

Labour Party spokeswoman on consumer affairs Kathleen Lynch said spiralling inflation made "a complete mockery" of Minister for Finance Brian Cowen's forecast that inflation would average at 2.7 per cent in 2006.

While some factors influencing the inflation rate such as interest rate increases and rising oil prices are beyond the Government's control, Ms Lynch said, this did not explain why inflation was running at a higher rate in the Republic than elsewhere in the euro-zone.

Green Party finance spokesman Dan Boyle said the Government could dampen housing inflation by taking steps to keep borrowing levels down.

Mortgage costs climbed as a result of the European Central Bank (ECB) quarter point rise in interest rates in June, but also because of higher house prices.

The higher repayments have added 1.5 per cent to the overall annual inflation rate.

Although the Government can do little about global oil and gas prices, Mr Boyle added, it can make Ireland less dependent on increasingly expensive and dwindling energy sources.

Energy prices have risen by over 10 per cent in the past year, boosting total inflation by 0.6 per cent over 12 months.

The price of petrol, diesel, home heating oil and solid fuels all rose in July, and added just under 0.1 per cent to the July CPI rate. Larger increases are expected in August and September, as consumers feel the effect of recent energy scares.

Meanwhile, the Sinn Féin spokesman on employment and workers' rights, Arthur Morgan, said the further expected increases in inflation over the coming months made the proposed Towards 2016 pay deal meaningless for most workers.

Economists now predict that inflation will average at a rate of between 3.8 per cent and 4 per cent this year.

Pat McArdle, chief economist at Ulster Bank, said the monthly rate would peak at 5 per cent toward the end of the year and was in danger of reaching 5.5 per cent in early 2007 as a result of further interest rate rises and ESB price increases.

Mr McArdle predicted that the annual rate of inflation in 2006 would average at 4 per cent.

Bank of Ireland's chief economist Dan McLaughlin said he expected inflation to average at 3.9 per cent, while Alan McQuaid, an economist at Bloxham Stockbrokers, said the annual rate would average at 3.8 per cent.

Under the standard measure to compare interest rates in EU countries, the Harmonised Index of Consumer Prices (HICP), the annual Irish rate was 2.9 per cent in July, compared to an estimated EU average of 2.5 per cent.

The annual rate of inflation for goods was 1.7 per cent in July, while the cost of services showed an annual rate of increase of 6.4 per cent, which the Irish Business and Employers Confederation (Ibec)'s chief economist David Croughan described as "a major concern".

Patricia Callan, the director of the Small Firms Association, called for the re-establishment of an anti-inflation group of social partners to combat the problem of spiralling prices.

Meanwhile Jim Curran, the head of research at small business group ISME, called on the Government to reduce the level of excise duties on oil and implement an alternative energy policy without delay.