Inflation is expected to peak this year at well over 5 per cent following the release of worse than expected figures for April. A dramatic increase in labour costs combined with the weak euro and high oil prices helped to push the headline figure for last month up to 4.9 per cent, the highest rate since 1985. It was an increase of 0.3 of a percentage point on March.
The figure is well ahead of most predictions and economists at the main financial institutions are now warning that the average rate of inflation for the year will be well above 4 per cent and considerably above the target figure of 3 per cent set by the Minister for Finance Mr McCreevy in last December's Budget.
The Taoiseach told the Dail yesterday that the figure "was higher than anyone would like". He said the Government still believed that inflationary pressures would ease in the second half of the year and that the average figure for 2000 would be around 3 per cent.
The continued upward spiral of Irish inflation is expected to provoke further warnings from the European Commission and the European Central Bank that the Republic's economy is in danger of overheating. Inflation has more than trebled since last October.
"The figures are at the upper end of expectations. They are almost frightening," said Mr Jim Power, chief economist with Bank of Ireland. The Government and most economists underestimated the extent to which wage inflation was feeding through into the overall inflation figure, said Mr Power.
Most analysts had predicted that April's figure would be in the range of 4.5 per cent and 4.6 per cent. Labour cost inflation - as reflected in the service and related expenditure component of the consumer price index - increased by 6.5 per cent on a year-to-year basis.
Bank of Ireland predicts that the figure could reach 10 per cent before inflation starts to decline towards the end of the year.
The introduction of the £4.40 minimum wage at the start of April was a significant factor in driving up labour costs, according to Mr John Beggs, the chief economist with AIB.
The bulk of the year-on-year increase was accounted for by the weak euro and increased oil prices he said. "They account for 2.2 per cent of the 4.9 per cent increase," said Mr Beggs.
Dr Dan McLaughlin, chief economist with ABN Amro, also predicted that the annual inflation figure would be in excess of 4 per cent. "They are disappointing numbers. The expectation was that we were reaching a peak," he said
The euro was showing some signs of recovery or at least stabilising against sterling, which should give some respite next month, he said. Other factors that served to push up inflation last month were the increases in the price of beer and spirits as well as transport costs.
Higher housing costs also fed inflation following increases in mortgage interest repayments and the price of repair and decoration materials, according to the Central Statistics Office.
When the inflation figure is adjusted to make it comparable to indicators in other EU states, the outlook is less bleak.
The Government also published data yesterday on manufacturing prices. The wholesale price index is up 5.4 per cent on a annual basis and 0.2 per cent on a monthly measure. April was the fifth consecutive month showing an annual increase in excess of 5 per cent.
