The Government can take immediate steps to deal with inflation, a study published yesterday claims, but it blames the euro's weakness for much of the problem.

Economist Mr Paul Sweeney, the author of Irish Inflation in 2000, said: "It could avoid new spending taxes in the forthcoming Budget or, if it wished to have a positive effect by reducing inflation, it could cut VAT by 2 per cent and this would reduce inflation by close to 1 per cent."

But much of Ireland's inflation is internationally driven, the report concluded. The euro's fall against sterling and the dollar was key to Irish inflation, it said.

The report, commissioned by food and grocery distributor the Musgrave Group, said Ireland was exceptionally dependent on imports from states outside the euro zone.

This had contributed strongly to recent higher levels of Irish inflation and compounded the effect of higher oil prices throughout the EU.

"Therein lies the kernel of high inflation in Ireland," said Mr Sweeney.

"Most of our imports are from non-EU states. The US and the UK account for half of our imports. Unless the euro picks up, and picks up quickly, we will see prices continue to rise."

Other contributory factors included the rise in oil prices, Government taxation measures and the increased cost of domestic services, the report said.

The full effects of the euro's fall and the rise in oil prices had still to affect prices and inflation, Mr Sweeney warned.

The report said food and general inflation had still not matched the level of decline in the euro against sterling over the past two years. This might induce second round price rises in the domestic economy in 2001, said Mr Sweeney. Similarly, oil price rises had not yet worked their way fully through the economy, he said.

In assessing food inflation, the report points to a high level of food imports from countries outside the euro zone - 79 per cent - compared to much lower levels of such imports in other euro zone countries.

"There is still significant pressure there for further price rises, particularly in UK food imports," said Mr Seamus Scally, managing director of the Musgrave group. "We are trying to source in the euro zone as far as we can, but there are issues to be dealt with such as labelling, language, sourcing and cost. When all of these things are added up, it becomes complex and difficult."