Analysis: Spending beginning to take toll on prices, writes Marc Coleman, Economics Editor.

There are still some six months to go before the full impact of Special Savings Incentive Accounts (SSIA) is felt by the economy. But the latest inflation figures from the Central Statistics Office (CSO) suggest we won't need to wait until then for inflation to surge. It's already happening. After dipping slightly in December, the rate of inflation has since then risen in leaps and bounds from 2.5 per cent to 3.8 per cent in April. What will happen once the full force of SSIAs and planned government spending increases impact on the economy is not easy to predict. But it's not likely to be pleasant.

It would be too easy to blame energy prices - driven by higher oil prices - for the recent surge. Yes they are rising annually by 10.3 per cent and are part of an upturn in the cost of living since the middle of last year. But in analysing inflation, three ideas have to be kept separately in mind.

The first is the level in prices. The second is the annual rate at which that price level is increasing, ie the rate of inflation. And the third is how stable that rate is.

Oil prices climbed significantly last summer but have, apart from very recent climbs since then, remained stable at those higher levels. Education and health service costs have also risen significantly over the last year, but the pace of this has eased off in recent months.

While these factors explain higher price levels in April compared to a year before, they don't fully explain why the rate of inflation has accelerated since December. To figure that one out, we need to look at how prices have grown in the last three months.

The CSO breaks its inflation statistics down into very useful categories that give us a look inside the workings of the economy.

One of the most remarkable statistics relates to the jump in prices of clothing products. Prices in this category rose by a whopping 15.1 per cent in just three months. Furniture and household goods prices also rose strongly - by 2.2 per cent - during that period.

These two numbers are interesting because although now significantly higher than three months ago, until recently prices in that category were falling or rising very modestly. Food prices have also risen by 1.8 per cent, restaurants and hotels prices by 2.3 per cent, and transport costs by 2.6 per cent.

If these numbers appear small, consider that until last year annual inflation was running at around 2 per cent. In other words in three short months the prices of some goods have risen by more than average prices were rising by a year ago.

What is the cause of this? As the famous monetary economist Milton Friedman once said: "Inflation is always and everywhere a monetary phenomenon." After years in which credit has expanded in double-digit figures, the spending associated with this extra borrowing is finally taking its toll on inflation figures.

With borrowing continuing to increase at thirty per cent a year and with SSIAs and Government spending increases set to drown the economy in cash later this year, you ain't seen nothin' yet.