Is it boom or bust? The public could be forgiven for feeling confused. Over the past two weeks we have had news that inflation is running at more than 4 per cent. The European Commission has warned that this will have dire consequences unless something is done. Hold fire on tax cuts and spending increases is its prescription. But according to the Minister for Finance, Mr McCreevy, Europe simply does not understand the Irish economy and there is little to worry about.

So where is the truth? As ever, it is somewhere between the two positions but, on balance, the Minister is probably closer to it. There is certainly high inflation in terms of consumer prices and in many assets, particularly house prices.

Inflation is also rampant in other areas of the economy. As the Central Bank pointed out recently, the long delays for the services of electricians or plumbers or, indeed, for new cars are symptoms of inflation. Queueing after all is simply another form of inflation, where demand is exceeding the economy's ability to supply.

As Mr Jim O'Leary, chief economist at Davy Stockbrokers, put it: waiting six months for an electrician to do a botched job which then has to be redone is inflation. So is waiting three or even six months for a new car.

The price of drink and cigarettes and meals out are all rising rapidly as are prices at petrol pumps.

Overall, services inflation which takes into account most fees, creche prices, meals out and so on is also increasing quickly and could rise even faster - perhaps by as much as 7 per cent a year. All of this will, of course, make the latest national pay deal less valuable to the average worker. Inflation at 4 per cent or higher will eat into agreed wage rises. But these factors do not create the conditions which might result in an economic bust.

Neither do the bulk of the elements causing the current price pressures. The 50p price rise on a packet of cigarettes added about 0.75 of a percentage point to inflation. A cut in VAT or indeed in the excise duty on wine would have avoided the rate going over 4 per cent, although either would have made little difference to the overall competitiveness of the economy.

The rise in oil prices over recent months has also had a large impact. The price of oil rose from $9.50 (€9.46) per barrel in early 1999 to $24 in December, and has climbed further in the past few months to stand at $27. This has pushed fuel and transport costs up across the globe. Here, energy costs in January were 12 per cent higher than a year ago, which directly added some 0.6 percentage points to the January inflation. The combination of tobacco and oil-price rises make up half the rise in the index.

However, there are other offsetting factors - chiefly the continually declining prices of clothing and footwear. This is the direct result of competitive pressures. It may have been triggered by the Asian crisis and sustained by the Internet. It would also have been influenced by the entry of British retailers which frequently do not change prices to take account of the sterling differential.

The main worry of many observers is that higher inflation will erode competitiveness here and will bring a premature halt to the expansion of recent years. However, to impact seriously on competitiveness the prices of our traded goods - that is our exports - need to increase faster than those of our competitors. There is simply no sign of this happening.

Competitiveness is likely to be eroded to some extent through wage inflation. However, in itself this may be no bad thing. After all, the usual response to rising prices is a rise in interest rates and, normally, the exchange rate. It is certainly true that if we were not in the euro the pound would be worth a lot more against sterling and interest rates could even be twice as high. But our interest rates and exchange rates are dominated by the needs of economies such as France and Germany which are only just emerging from prolonged recession.

That leaves very few levers of policy at the disposal of the Irish authorities. The traditional alternative method would be to use fiscal or tax-and-spending policy. That is the prescription being offered by commentators such as the European Commission.

However, that may not be the best way to do the job. Tax cuts and huge spending on projects such as the new roads system and the LUAS light rail project will stoke demand in the economy. In the medium term they will also ease capacity constraints, particularly in housing and transport. Tax cuts would probably increase the labour supply, particularly of women and immigrants. It could very well be that the best way to ease pressure is to use rising wages to take the edge off competitiveness. This does not means that the economy becomes uncompetitive overnight.

According to Mr O'Leary average unit wage costs here are less than 70 per cent of the equivalent in some of the main industrialised euro-zone economies so there is plenty of spare capacity. But it may make some difference to individual companies. Overall, it is important to remember that while the economy is certainly booming that does not mean we have to look for a bust round the next corner. Last year, it probably grew at more than 10 per cent in terms of Gross Domestic Product. Most commentators are predicting a slowdown this year. But that was the prediction in every January and February for the last three years. It was usually wrong.

The fear is that the bigger the boom the bigger the bust. This is like comparing the boom to a party. But in reality the hangover does not have to be huge. As Mr O'Leary points out, it is simply a truism that expansion is always followed by recession. After all, every economy in history has had at least one recession at least every quarter-century. But recessions happen following very minimal expansions. This State has had its fair share in the past. And booms can last decades and even longer on occasion.