The annual rate of inflation increased to 4.2 per cent in July from 3.9 per cent in June due to higher energy prices and mortgage rates, the latest consumer price index shows.
The most significant price increases were in sectors most exposed to higher fuel and energy costs. The sub-category of the index covering housing, gas, fuel and energy costs rose by 3.3 per cent in July and has risen by 16.5 per cent in the past 12 months.
The most significant price increases were in sectors most exposed to higher fuel and energy costs
The recent interest rate tightening by the ECB has also increased the cost of mortgage payments, the Central Statistics Office said.
The full impact of the June interest rate rise was captured by the July index as lending institutions passed on the rate increase before July 11th, the day chosen to price the consumer basket of goods and services. But the most recent quarter point hike on August 3rd has yet filtered through to the index.
If energy and mortgages, which account for only 11 per cent of the CPI basket, are excluded inflation is running at just 2.1 per cent. In other words, energy and mortgages accounted for exactly half of the increase in the CPI in the year to July.
Transport and the hospitality sector also felt the knock-on effects of higher fuels costs and have risen by 4.7 per cent and 4.1 per cent respectively since July 2005.
Irish inflation, as measured by the euro zone HICP measure that strips out housing costs, remained at 2.9 per cent in July. The annual rate of inflation for goods was 1.7 per cent in July, while the corresponding rate for services was 6.4 per cent.
A breakdown of the components of the basket of goods and services used to calculate the consumer price index suggests that inflation is upward bound. July's inflation would have been higher but for heavy discounting in the summer sales. Clothing and footwear prices fell by 10.6 per cent in the month and are down 2.6 per cent 2.6 per cent since July 2005.
Food and soft drinks prices decreased by 0.1 per cent in the month and are lagging the overall inflation figure having increased by 1.5 per cent in the year to July.
In the past 12 months mortgage interest payments have risen by 33 per cent, natural gas by 25.3 per cent, petrol by 13 per cent and health insurance by 12 per cent.
With little prospect of a peaceful resolution of the Middle East crisis and electricity and health insurance costs set to increase in the autumn, the outlook for inflation in the coming months is looking gloomy and may restrict Brian Cowen's room for manoeuvre on what is expected to be a pre-election "giveaway" budget.
While energy and mortgage costs account for half the overall inflation rate economists expect inflationary pressures to arise in other sectors such as food in the coming months.
The European summer growing season was affected by drought and crop yields are down meaning food prices may rise significantly in the autumn, unless retailers allow shrinking margins. Rossa White, an economist at Davy stockbrokers expects the combination of higher interest rates, gas and health premium increases to push inflation towards 5.5 per cent by the end of the year.