The recent surge in inflation may be of benefit, according to the Economic and Social Research Institute, by providing an opportunity to renegotiate the partnership agreement with a focus on flexibility and larger gains for employees.

Mr Danny McCoy, editor of the institute's quarterly commentary, which was published yesterday, called for economy-wide gain-sharing.

"We need imaginative solutions and a different way of handling the wage negotiations."

He added that, with growth at close to 10 per cent, there was room for an additional 4 per cent pay package, although this should be in the form of deferred compensation - for example pensions bonds, individual retirement accounts or savings packages. He added that the impact of inflation on those on fixed incomes should be acknowledged.

According to Mr McCoy, the Programme for Prosperity and Fairness (PPF) needs urgent reassessment and high inflation is providing that opportunity. "So long as we concentrate our minds on keeping the economy competitive and do not throw it away to the detriment of all our living standards, more can be awarded," he said.

He added that there was a new paradigm for the economy, which is full employment and a position as a regional economy of the euro zone. That is in contrast to the position in 1987 when it was a high unemployment national economy. Thus the same inflexible wage deals were no longer relevant. He added that employees would need to justify productivity to get in excess of the wage agreement.

Competitiveness was the key, Mr McCoy stressed, and the only concern was that wage rises would move out of line with productivity. Prof John McHale, of Harvard University, who has an article attached to the quarterly, also said that deferred compensation measures offered the most hope. These include individual retirement accounts, pensions bonds or savings incentives.

Mr McCoy has increased the ESRI's forecast for average annual inflation this year to 5.3 per cent this year and 3.6 per cent in 2001, ahead of the Minister for Finance's latest prediction of an average of 5.25 per cent in 2000. The institute believes it will peak at 6.4 per cent in the last three months of the year.

However, it warned that this assumes a resurgence in the value of the euro and a drop in oil prices. It is estimating that the euro will come close to parity with the dollar by the end of next year. He also warned that if wage expectations are not contained inflation will run to far higher levels.

"It is King Canute-like to say you can control inflation," he added.

The ESRI also found that the economy is to grow as strongly this year as last. However, the institute is a little more pessimistic than other private sector commentaries and even the Department of Finance and the Central Bank.

It has revised real growth in gross domestic product for 2000 up to 9.6 per cent, with nearly 6.9 per cent forecast for 2001.

Meanwhile, unemployment is predicted to fall to 4 per cent on average next year, from 4.4 per cent this year.