Inflation in Ireland has risen sharply as fresh warnings from the European Central Bank (ECB) over inflationary pressures suggest that interest rates may rise sooner than expected.

Inflation data released yesterday by the Central Statistics Office (CSO) shows that Ireland's annual rate of inflation, as measured by the Consumer Price Index (CPI), was 3 per cent in September, the highest level since August 2003.

This compares with a rate of 2.3 per cent in August. At 2 per cent, the rate of inflation was significantly lower in September for goods than for services, where inflation ran at 3.9 per cent.

Speaking to reporters after the Leinster Society of Chartered Accountants' monthly lunch yesterday, Central Bank governor John Hurley said that, while the higher inflation number had been expected, the ECB remains vigilant to inflationary pressures, in particular energy costs.

"We discussed this at length last week and clearly we did not change interest rates," he told reporters. "But there are upside risks to inflation and, for that reason, we did express that we would have to have strong vigilance going forward."

Mr Hurley said that, despite the increase in inflation, interest rates remain at the correct level.

Of the 3 per cent rise in annual prices, increases in prices for the single category of housing, water, electricity, gas and other fuels contributed 1.36 percentage points, almost half of the total. Price trends in this category, which rose by 11.1 per cent year on year in September, have been strongly dominated by the effect of recent oil price increases.

Increases in the transport sector, where inflation was 6.4 per cent, accounted for 0.87 per cent, or almost one third, of the total price increase. Inflation was also strong in the categories of education and health.

By contrast, prices of clothing and footwear products continue to decline on an annual basis, although more recent price trends have been upward due to strong retail activity over the summer. Prices for household equipment and maintenance goods were also lower in September than a year previously.

The rate of inflation in the euro zone was 2.5 per cent in September according to the harmonised index of consumer prices, compared with 2 per cent in August. The ECB's reference value for inflation - used to gauge the need for interest rate increases - is 2 per cent.

The ECB said in its latest bulletin, released yesterday, that inflation would decline after a short-term period of elevation. But the bulletin's editorial said that high oil prices created "upside risks" for inflation and that it was crucial to monitor how this affects price stability over the medium term.

The ECB Governing Council would be vigilant in monitoring developments that could put further upward pressure on prices, including wage demands, indirect taxes and administered prices, according to the bulletin.

On an EU harmonised basis, Ireland's inflation rate was 2.8 per cent, compared with 2.1 per cent in August.