The annual inflation rate is set to accelerate to well over 3 per cent in the coming months.
The latest figures show that prices in June were running 2.9 per cent ahead of the same month last year.
The Consumer Price Index figures will add to fears of a sustained pick-up in inflation and will intensify the debate over the shape of next year's Budget.
The figures, published yesterday by the Central Statistics Office, show that inflation in the Republic is running well ahead of the other 10 EU countries which are heading into monetary union. They come in a week when the president of the European Central Bank, Mr Wim Duisenberg, has twice warned that the 1999 Irish Budget will need to be tight to ward off inflationary pressures.
The pick-up in inflation in recent months appears to be mainly due to more expensive imports from Britain, resulting from the fall in the value of the pound against sterling last year. As this effect continues to feed through to prices, economists have warned that inflation is likely to keep rising over the coming months.
According to Mr Jim O'Leary, chief economist at Davy Stockbrokers, inflation could well be heading towards four per cent by the end of the year. "A further acceleration is virtually guaranteed in July and August", he said.
However, most forecasters believe that inflationary pressures should start to slacken at the turn of the year as an expected easing in the value of sterling takes pressure off Irish prices.
Large price rises in food and drink were mainly responsible for the overall consumer price increase of 0.5 per cent in June. Food prices rose by 0.8 per cent in the month and alcoholic drink prices went up by 1.2 per cent. Over the past 12 months, food prices have risen by 5.1 per cent and drink prices are up 4.3 per cent, while tobacco has risen in price by 4.7 per cent.
Prices have gone up across a wide range of basic foodstuffs in recent months, particularly fresh vegetables such as potatoes and tomatoes, as well as fresh fruit, pork, poultry, fish and soft drinks. However, beef and lamb prices are down. Drink prices have been pushed up by the 5p rise in the price of a pint.
Price rises for magazines, resulting from the strength of sterling, also drove up the index.
In contrast, one factor which has helped to keep inflation in check is the 5.5 per cent fall in clothing and footwear prices over the past year. However, over the last three months prices in this sector have been on the rise again, increasing by 0.9 per cent.
The increase in inflation will be closely watched by our European partners, who will fear that the further fall in interest rates later this year will add to price pressures. The EU Commission and the Organisation for Economic Co-Operation and Development have already warned the Government that it should introduce a tight Budget and hold back on major tax reductions. Mr Duisenberg added to the warnings this week.
The Minister for Finance, Mr McCreevy, has said that the shape of the Budget is not a matter for the European Central Bank. However, his spokeswoman yesterday pointed out that, at the time of the revaluation of the pound's ERM rate earlier this year, the Minister pledged to frame the next Budget with a view to keeping inflation at a low level.
The Government has indicated that it intends to direct tax reductions in the Budget at low to middle income earners and is expected to argue that this is not inflationary.
The Labour Party's spokesman on finance, Mr Derek McDowell, said that responsibility for the growth in inflation lay with the Government. "As a result, people are suffering, and the weakest members of our community will be particularly affected by the increase in the cost of food."