Annual inflation fell to 4.3 per cent in October, its lowest level since February 2000, as lower mortgage rates began to feed through to prices. But the welcome fall in inflation was accompanied by worrying figures from the manufacturing sector.

Early Central Statistics Office (CSO) estimates showed industrial production in the three months to the end of September was down 8.1 per cent on the previous three-month period. Analysts said this suggested a sharp weakening of activity in the manufacturing sector.

"Given that this sector accounts for roughly one-quarter of activity in the economy, it is very hard to imagine that the economy as a whole did not contract in the third quarter," said IIB Bank economist Mr Austin Hughes.

By contrast, the inflation figures provided some good news, showing an easing in price pressures from the high levels of last year. Figures from the CSO showed the October consumer price index was 0.3 per cent higher than in September. But the index posted a smaller increase than in October 2000, when it rose by 0.7 per cent.

Among the factors behind the monthly change was a 2.7 per cent drop in housing costs, partly due to lower mortgage interest repayments following September's rate cut.

Pushing prices up, however, was an increase in transport costs, as the cost of motor insurance premiums, motor fuel and public transport rose. Services and related expenditure also rose as charges for education, cable television, childcare, package holidays, medical fees and hairdressing increased, the CSO said. A rise in the price of solid fuels and home heating oils and higher prices for cosmetics and certain newspapers also fed through to the index.

Economists now expect inflation, which hit a 16-year high of 7 per cent last year, to remain on a downward course, falling below 4 per cent next year. "It is very clear that the current global economic backdrop will exert a substantial downward pressure on inflation worldwide, to the point where the prices of many goods imported into the Irish economy are likely to fall in coming months," said Mr Hughes. He expects inflation to end the year around 4 per cent, before falling back to around 3.5 per cent on average next year.

Employers' group IBEC is also forecasting lower inflation next year when it expects the rate to drop to 3 per cent. But it warned that lower inflation needed to be recognised by employers, trade unions and the Government in wage-setting, in enhanced productivity arrangements and, in the case of the Government, in the size of spending increases. "Failure to do this would result in further losses of competitiveness at a time of extremely difficult trading conditions," IBEC said.

On an EU-harmonised basis, prices rose by 0.5 per cent on the month and increased by 3.8 per cent in the 12 months since October 2000.