Inflation has fallen to its lowest level in two years - easing to 3.8 per cent in November from 4.3 per cent in October - as cheaper energy costs and falling mortgage rates fed through to lower prices.

The good news on inflation was accompanied by a rising retail sales index in October, underlining the resilience of the Irish economy, analysts said.

The value of sales rose by an annual 5.6 per cent in October, the Central Statistics Office (CSO) said, while sales volume was up 3.2 per cent year-on-year.

For the three-month August to October period, which gives a more stable indication of the underlying trend, sales volume was up 1.9 per cent.

"It is certainly an encouraging sign that there was not a dramatic deterioration in the wake of the September 11th attacks," said Mr Austin Hughes, economist with IIB Bank.

Meanwhile, CSO figures showed the consumer price index fell by 0.1 per cent last month.

Lower housing costs due to falling mortgage rates, and a drop in the price of home heating oil were among the main factors contributing to the drop in the index.Transport costs also decreased following a fall in motor fuel prices.

The fall in prices in these categories helped offset a further rise in the cost of services and related expenditure, higher prices for alcoholic drinks and an increase in the cost of clothing and footwear.

Analysts said the drop in the annual rate of inflation owed much to a flattering comparison with November last year, when inflation peaked at 7 per cent.

"Energy costs and mortgage rates fell sharply last month while November of last year saw a substantial increase in mortgage costs," Mr Hughes said.

But economists warned that inflation could rise temporarily next month because of a number of special factors. These include higher electricity costs and higher cigarette, cider and petrol prices, following the Budget.

Over the longer term, the trend should remain downward, although the increase in VAT next year will have an impact - while there is still some uncertainty about the effect of the euro. Welcoming yesterday's figures, the Minister for Labour, Trade and Consumer Affairs, Mr Tom Kitt, warned consumers to remain vigilant in monitoring prices when the euro is introduced.

"Consumer vigilance is the best protection against any possible unjustified price rises," he said.

Meanwhile, IBEC again said lower inflation must be reflected in lower wage expectations. It noted that the Republic had the fourth highest rate of growth in unit wage costs in the OECD area, and said this could erode much of the real gains in living standards achieved in recent years.

On an EU-harmonised basis, consumer price inflation fell by 0.2 per cent in November and was up by 3.4 per cent year-on-year.

In October, the latest month for which figures are available for all EU states, Irish inflation stood at 3.8 per cent.

This was the third highest in the EU, after the Netherlands and Portugal.