Today sees the publication of inflation data for October, the final set before next month's Budget. Perhaps, it is folly rather than bravery that tempts me to hazard a guess in print at the October outcome.

For most of this year, monthly inflation data have confounded economists' expectations. In part, this is because guesstimating the outcome of a process in which the Central Statistics Office (CSO) gets more than 45,000 price quotations cannot be a precise science. More importantly, these surprises reflect the range of exceptional forces at work in the Irish economy.

For what it's worth, I expect inflation to rise from 6.2 per cent in September to around 6.6/6.7 per cent in October. The likely acceleration owes much to a rising trend in mortgage costs in recent months against declines last year. The same factor will probably cause inflation to edge higher in November, but a significant easing looks likely the following month, assuming Minister for Finance Charlie McCreevy doesn't raise cigarette duties sharply next month.

The prospect that we may be close to a peak in inflation has reawakened a degree of optimism as to the longer-term outlook. Indeed, some forecasts envisage inflation tumbling towards 3 per cent next year. These reflect the view that prices are now being boosted by factors that will shortly fade.

Certainly, this year's out-turn owes much to a rising trend in interest rates and oil prices, factors that are unlikely to be as strongly negative next year. As a result, the balance of probabilities favours lower inflation in 2001.

However, I would not be optimistic that the fall will be dramatic. Consumer prices have been held back in recent months by temporary price freezes in a number of areas, notably in relation to drink prices, health insurance premiums and various public sector charges. An eventual rebound in these prices would reduce the scope for a sharp fall in inflation.

Two other considerations suggest inflation could average close to 5 per cent next year. With the notable exception of oil prices, I reckon that euro weakness has not yet had a forceful impact on Irish inflation. Certainly, import prices have accelerated dramatically of late and it will take time for this to feed through to higher shop prices. In this regard, Bank of England research suggests that the boost to Irish inflation from a weaker currency could be two-and-a-half times greater in the second year than in the first.

Finally, detailed CSO data show that the prices of imported goods such as clothing, cars and toys have had less impact than many domestic inflation components. These factors lead me to conclude that the euro has not been the key culprit in higher inflation this year, but it could pose considerable problems in the future.

Another risk factor is the likelihood that domestic spending will remain buoyant next year. Early smoke signals and the sheer weight of expectations suggest the upcoming Budget could add significantly to household spending power.

Already, a range of anecdotal evidence, augmented by more formal indicators such as an extremely low jobless rate, point to an economy facing significant capacity pressures. With spending power rising and wage growth accelerating, domestic pressures on Irish consumer prices may well intensify next year.

Drawing the various strands together, it seems possible to imagine Irish inflation averaging close to 5 per cent in 2001. It is also possible to imagine that, if the economy remains buoyant and the euro doesn't recover dramatically, inflation could remain stuck in a 4 per cent to 5 per cent range in subsequent years.

The higher rate risks becoming embedded in the economy, as people begin to believe that it is the true or "permanent" rate and behave accordingly.

Of course, one school of thought holds that relatively high Irish inflation is not worrisome because it acts as a natural correcting mechanism in an economy undergoing rapid transformation. I'm not so sure. First of all, there is a risk that Irish businesses and employees raise prices and wages to a degree that can't be sustained over the longer term.

Unfortunately, we can't know in advance how much prices and wages can rise in Ireland relative to those abroad before they "overshoot" to the point that the outlook for activity and employment worsens significantly. However, such uncertainty can't justify complacency.

Another problem rarely focused on is the damage high inflation does to economic efficiency, as firms and workers are deflected from the most productive activities and devote increasing amounts of time and effort to try to reduce their "real" losses.

Finally, relatively little attention has been paid to the impact of inflation on income distribution within the economy. There are large differences in the capacity of various firms and households to insulate themselves from higher inflation. In general, the weaker the market power of a household or firm, the greater their likely loss from higher inflation.

For all these reasons, I hope next month's Budget addresses the issue of inflation in a coherent and comprehensive fashion.

Austin Hughes is chief economist at IIB Bank