Inflation during December increased to 4.2% as revenue-raising measures in the Budget fed through into economy

Inflation rose to 4.2 per cent in December from 3.8 per cent in November as tax increases announced in the Budget pushed prices higher. Increases in the cost of cigarettes and petrol as a result of the Budget were among the main factors behind a 0.5 per cent jump in prices between November and December. Tobacco prices rose by 2 per cent following the Budget increase in excise duty while transport costs were up by more than 1 per cent.

Also fuelling the rise in consumer prices were higher electricity prices, and increased service costs because of higher medical fees and increased charges for education, entertainment, hairdressing, video hire and public telephone calls.

The only significant downward pressure on the index came from housing, where costs fell by 1.7 per cent due to lower mortgage interest repayments.

Analysts said the rise in services and related expenditure was a particular cause of concern. Annual inflation in this area is now running at 8.3 per cent. "From the domestic consumer's point of view, the upward pressure on service sector inflation is pretty severe and is worrying," said Mr Jim Power, chief investment strategist at Friends First Asset Management.

IIB economist Mr Austin Hughes said the figures suggested "a relatively high inflation climate has become embedded in the Irish economy" with households and firms viewing an inflation rate of around 5 per cent as the norm. "To the extent that this rate influences wage demands and profit expectations, it darkens the medium-term outlook for the Irish economy," he said.

On the positive side, there was little evidence of price rises ahead of the launch of the euro in the figures, analysts said. But they noted that the existence of substantial inflationary pressures before the introduction of the euro made it difficult to determine with any accuracy the impact of the changeover.

The Labour Party said there must be a concern that at least part of the consumer price index rise in December was due to increases imposed in advance of the changeover to the euro. It described the December increase as "alarming" and said it would "create difficulties for those people on fixed incomes, whether working or on social welfare".

Fine Gael called on the Government to manage growing demand in the economy by controlling its own spending, particularly capital spending. "It should also tackle entrenched monopolies and encourage increased competition in all sectors of the economy," it said.

The annual rate of inflation for 2001 was 4.9 per cent, down from 5.6 per cent in 2000. On an EU-harmonised basis, consumer price inflation rose by 0.9 per cent in December and was up by 4.4 per cent year-on-year.