The annual inflation rate has jumped sharply to 3.4 per cent, its highest level since 1993 and further increases are expected in the months ahead. The latest rise has led to warnings of a sustained pick-up in inflation, fuelled by a weak euro and strong spending, which would lead to demands for higher wage increases as part of a new national agreement.

The underlying annual rate of inflation, which excludes mortgage payments, is at its highest level in over a decade, at 4.2 per cent.

According to the latest data from the Central Statistics Office, in just over two months the headline inflation rate has effectively doubled. According to economists, this marks the beginnings of a sharp deterioration in Irish inflation.

Many forecasters are now expecting inflation to average up to 4 per cent in 2000.

The Fine Gael spokesman on Finance, Mr Michael Noonan said the limit of prudence has been reached. "It does not take a great deal of imagination to foresee the disastrous consequences of high price rises across the economy," he added.

The main reason for the sharp increase in prices in December was the 50p price rise for a packet of 20 cigarettes, announced in the Budget. This was responsible for a 0.8 of a percentage point rise in the index, accounting for the bulk of the 1.1 of a percentage point monthly rise.

But there are also other signs of longer-term factors pushing the inflation rate upwards. The pressures are "multiple", according to Mr Oliver Mangan, economist at AIB, and include the weak euro - which increases import prices from outside the euro zone - high excise duties, labour shortages, a pick-up in oil prices, inappropriately low interest rates and an expansionary fiscal policy, in an economy which is already facing serious capacity constraints.

He added that the pressures are already evident in runaway house price inflation, a breakdown in wage restraint - with wage rises of 5 per cent to 6 per cent in many industries - a jump in services sector inflation to close to 6 per cent and rising factory gate prices. "These pressures are set to continue and the core (underlying) rate will average 3.9 per cent in 2000 with the headline inflation rate only a little below that, 3.7 per cent, the highest in over a decade."

The next set of inflation figures are likely to show that the rate rose again this month. January sales discounting may not have been as deep as last year and, on top of this, publicans pushed up alcoholic drink prices over Christmas. Also, rail and bus fares rose in early January for the first time in recent years and oil prices are on the increase.

Most of the price pressures are still coming from the energy sector - particularly higher oil prices - and services inflation and there is still very little inflation on the high street, according to Dr Dan McLaughlin, chief economist at ABN Amro.

But there are risks of a more generalised pick-up, he believes, given the weakness of the euro against sterling in particular. Yesterday the euro - thus the pound - closed at yet another 20-year low against sterling, as the British currency continued to surge. The euro closed at 61.17p against sterling from 61.58p, leaving the pound at 77.66p from 78.18p on Wednesday.

Dr McLaughlin added that there are two inflation risks in the coming year. The first is that oil prices will continue to rise and the other is that the euro stays where it is, or falls further, risking imported inflation. With 80 per cent of all imports originating outside the euro zone this is obviously a danger. Mr Austin Hughes, economist at Irish Intercontinental Bank, pointed out that Irish inflation is now way above the level that would have allowed us to join the euro under the rules set for membership. This is likely to worry international investors and depress the equity market.

He also noted that the poorer inflation backdrop risks becoming perpetuated in a multi-year pay deal in the talks now under way on a new agreement.

Inflation averaged 2.8 per cent in 1999, the highest rate since 1993 when price rises accelerated in the aftermath of the devaluation of the pound.

The Irish inflation rate is now the highest in the EU, compared with just two years when an Irish inflation rate of 1.1 per cent was the lowest in the euro zone.