Inflation eased slightly in February, falling back to 4.7 per cent from 4.9 per cent in January but it remained well above the EU average. Figures released yesterday showed that over the course of the month, prices rose by 0.7 per cent. Jane O'Sullivan reports.

But as prices had increased by 0.9 per cent in February last year - a month when inflation usually rises sharply as retailers introduce new ranges after the sale - the annual inflation rate declined.

Despite the fall, economists said they remained worried about the underlying situation.

"We think the trend is still problematic," IIB economist Mr Austin Hughes said.

"We expect inflation to reach 5 per cent in March and expect only a modest easing thereafter," he said, noting the rise in the VAT rate to 21 per cent, higher drink prices and a rising trend in fuel costs should push inflation higher next month.

Dr Dan McLaughlin, economist with Bank of Ireland Group Treasury, said he also believed inflation would hit 4.9-5 per cent in March.

But he expects it to decelerate from there, towards 4 per cent by year-end, as last year's sharp rises in food prices are unlikely to be repeated this year.

The most notable price change last month was in the cost of clothing and footwear. This rose by 8.5 per cent as prices recovered following the conclusion of the January sales. The cost of furnishings and household equipment also increased by 1.5 per cent as a result.

Housing, water, electricity, gas and other fuel costs also rose by 0.4 per cent due to increases in average mortgage interest repayments, private-sector rents and domestic fuel oil.

Transport costs also increased, by 0.3 per cent, as a result of an increase in the cost of cars, higher petrol prices and higher charges for car hire.

Other goods to post an increase in prices were books, newspapers and magazines, package holidays, stationery, audio-visual equipment, cinema, nightclubs and gardening supplies, the Central Statistics Office (CSO) said.

The only category to post a decline last month was communications, which fell by 0.1 per cent.

On an EU-harmonised basis, consumer prices rose by 0.6 per cent over the course of the month and were 4.9 per cent higher than in February last year. This was down from 5.2 per cent in January.

But the Labour Party said it was concerned that inflation was now running at twice the European average rate.

"The figures do not include the impact of the 1 per cent increase in VAT rates that came into effect from March 1st," its finance spokesman, Mr Derek McDowell, said. "This is likely to lead to a further increase when the March figures are available."

In January, euro-zone inflation averaged just 2.5 per cent and looks set to fall further.

• Fresh economic data yesterday showed the embattled US manufacturing sector pulling out of a deep slump and consumer sentiment on the upswing, reinforcing notions the economy is emerging from recession.

The Federal Reserve said US industrial output rose 0.4 per cent in February, its strongest gain since mid-2000. With January figures revised upward, production posted its first back-to-back monthly gains since August and September of 2000.

Separately, the University of Michigan released a poll showing consumers were more upbeat in early March. The survey of consumer sentiment, released to subscribers and obtained by Reuters, rose to 95.0 from February's 90.7 - the highest reading since December 2000. - (Reuters)