Inflation edged higher in March, rising to 4.8 per cent from 4.7 per cent in February as last month's VAT hike kicked in.

Alcohol and tobacco were among the products to post price increases as a result of the restoration of the VAT rate to 21 per cent and trade price increases. The cost of alcoholic beverages in off-licences and supermarkets rose by 1 per cent while tobacco products increased by 2.9 per cent.

There were also increases in the cost of motor, house and health insurance premiums, higher charges for hairdressing, cosmetics and hair products and planning fees, the Central Statistics Office said, while the cost of licensed premises and eating out in restaurants and hotels also rose. The introduction of the plastic bag tax also had a slight effect on prices which rose by 0.9 per cent over the course of the month.

In the year to March, there were notable increases in the cost of health, which rose by 10.5 per cent, services which were up by 10.2 per cent and education, up by 9.4 per cent.

The sharp rises have prompted fears that an inflation culture is becoming embedded in areas of the economy where competition is lacking. "Granted, the providers in some of these areas have faced a significant increase in labour costs over the past couple of years but there is also strong evidence to suggest that margins are being increased simply because there is little consumer resistance to price increases," said Mr Jim Power, economist at Friends First.

On an EU-harmonised basis, prices rose by 0.9 per cent last month and were 5.1 per cent higher than in March last year, once again putting the Republic at the top of the EU inflation league.

Analysts said the risks on inflation were now on the upside and the Government could not afford to be complacent.

Higher energy prices have yet to feed through while mortgage rates could end the year 0.25 to 0.5 per cent higher as the European Central Bank reacts to stronger growth and perceived inflation pressures in the euro area.

IIB economist Mr Austin Hughes also warned that rises in oil prices could pose a particular threat to Irish inflation beyond its general impact on the global economy. "The risk is that, in a climate of generally high inflation, it will be far easier to pass on the indirect effects of higher energy prices on business costs and perhaps add to margins here than in economies characterised by relatively low inflation," he said.

Meanwhile, IBEC and the Small Firms Association (SFA) warned against high inflation.

"Our inflation rate is now twice the European average and our wage costs are increasing at three times those of our competitors," said SFA director Mr Pat Delaney.

"Ireland cannot continue to have wage-induced inflation running at twice the European rate and expect to remain competitive and maintain current employment levels," he said.