Inflation will average 4.8 per cent this year but will rise sharply higher than that over the coming months the ESRI has warned in its quarterly economic review.

The quarterly's new editor, Mr Danny McCoy, called for the Government to sit tight until the forthcoming Budget and then postpone tax cuts to reduce demand for goods and services.

Without appropriate action the economy could be heading for a wage price spiral, he warned. Mr McCoy warned that short-term measures such as cutting indirect taxes would only increase demand and be counter-productive. They should only be considered in conjunction with measures such as water and road charges, he said.

He added that price controls may do less damage to the economy but they too would, at best, have a temporary effect. "If it is temporary, it may not do too much damage to scapegoat the pub industry, but it is strange to go back to old-style economics," he said.

He also repeated the calls of most other observers that competition should be increased. "Allowing freedom of entry to the pub trade would be the best deterrent to super profits."

However, he admitted that politically this could be difficult and immediate measures could have the benefit of reducing inflationary expectations, which could lead to the downfall of the latest partnership agreement.

"These measures are just messing with thermometer and are not easing the overheating of the room," Mr McCoy said. "But, if they buy time and reduce expectations, they could prove effective."

This is the nub of the problem for ICTU. Even if officials believe that inflation will fall back later this year and into next, they are worried that a spike up to 6 per cent, ahead of the 5.5 per cent pay rise awarded under Programme for Prosperity and Fairness (PPF) could mean a renegotiation of the agreement.

According to Mr McCoy there should be a flexibility clause in the agreement which would allow policies to change with circumstances, although he added that the certainty suited employers.

According to the ESRI's forecast, inflation will fall back to 3.2 per cent on average in 2001, assuming a relatively benign world environment with oil prices stabilising and the euro appreciating.

At the same time growth in Gross Domestic Product will be 8.8 per cent in 2000 slowing to 6.9 per cent in 2001, as the tight labour market bites. As a result, unemployment will average 4.6 per cent in 2000 and only 4.1 per cent in 2001.

The report warns that this is putting severe pressure on the economy's infrastructure and the natural environment, giving rise to quality of life considerations.

The demand for housing has led to uncoordinated building and urban sprawl. "When the market has calmed down, we could be left with ugly urban configurations which would have eaten into places that would have been scenic around Dublin."

In a paper published in yesterday's ESRI quarterly review, DIT lecturer Dr Brendan Williams warned that Dublin could become a US-style edge city spreading from Dundalk, through Tullamore and Carlow to Gorey. "We are now creating an American-style edge city, but if we developed unused space within three miles of the city centre, much of the excess demand could be coped with."

He called for a land use survey, particularly of publicly owned land in the city centre, which could be used to build housing.