Inflation has fallen sharply, with the annual rate dropping to 2.3 per cent last month, its lowest level in four years. The sharper- than-expected fall means that the annual rate has now halved since the start of this year and is leading to downward revisions in inflation forecasts for 2004.

Business groups have warned that easing inflationary pressures must not be seen as an opportunity to push up indirect taxes on Budget day. Already the Estimates have signalled higher charges in health and other areas, which will have some impact in pushing up inflation next year. The Department of Finance estimated yesterday that the new charges would add 0.15 per cent to inflation next year.

Prices actually fell by 0.1 per cent last month, according to yesterday's figures from the Central Statistics Office, due to declines in the prices of clothing and footwear, household goods and a range of miscellaneous goods and services. The main increase was a 4.6 per cent rise in education costs due to higher fees for private secondary schools and playschools.

The annual rate of increase in the consumer price index fell from 2.9 per cent in September to 2.3 per cent in October and is now running at exactly half the 4.6 per cent average recorded last year.

There has been a significant decline in inflationary pressures across a range of sectors in recent months. Price increases are still running at a high level in some areas of the service sector - with health and education both registering annual increases of 6.9 per cent - but even in these areas inflation is slowing.

Overall, however, the annual rate of inflation for services at 3.3 per cent remains well ahead of that for goods, at 1.2 per cent.

"What we are seeing is generally a reaction on the part of retailers and service providers to the fact that consumers are increasingly price sensitive," said Mr Colin Hunt, chief economist at Goodbody Stockbrokers. The rising value of the euro, particularly against sterling, was also reducing inflation by cutting import prices, he said. Indications now are that inflation could average around 3 per cent next year, Mr Hunt added. AIB Bond Research, in its forecast, said it believed inflation could be as low as 2 per cent in 2004.

The decline in the inflation rate will be welcomed by business, which has warned that the high rate in recent years has damaged competitiveness. However, IBEC, the business lobby group, and ISME, the small-business organisation, warned yesterday that it must not be seen as a green light to increase excise duties and other charges in the Budget. Already the additional charges announced yesterday in health and other areas will have some effect on inflation, but increases in excise duties or VAT on Budget day could have a more significant impact on the 2004 rate.

Despite the decline in the rate, inflation here remains ahead of other EU countries.