Inflation has reached its highest level in three years, leaving the Government with tough choices as it begins to frame the 1999 Budget.
The latest figures from the Central Statistics Office show a rate of 2.7 per cent in May, well above the EU average. The new evidence of rising inflation comes as the Minister for Finance, Mr McCreevy, and his Cabinet colleagues prepare to discuss the budgetary options at a special Cabinet meeting today.
Given the inflationary trend and against a background of warnings that the economy may overheat, much of Mr McCreevy's focus will be on trying to persuade his colleagues that spending must be tightly controlled.
A number of prominent economists have argued for a Budget with tight spending controls and no tax cuts, in an effort to control climbing inflation. But the employers' body, IBEC, has called for the tax-cutting commitments of Programme 2000 to be met and for reductions to be concentrated on the lower paid, a stance also supported by the trade unions.
The rise in inflation will also increase pressure for tax cuts, as employees find wage rises eroded by higher prices. The 0.4 per cent increase in the Consumer Price Index in May was higher than many had predicted. Ireland now has the third-highest inflation rate in the EU.
Many forecasters expect the rate of increase in inflation to ease in the months ahead and end the year running at above 3 per cent. But if prices continue to rise at the level of recent months, inflation could exceed 5 per cent.
Prices have now risen by 0.4 per cent or 0.5 per cent each month for three months. The authorities will be concerned that they now have no way to stop them rising further. The figures will strengthen the Central Bank's determination to postpone cutting interest rates until as late as possible this year. With monetary union approaching it is unable to raise rates as it normally would to combat higher inflation.
The Central Bank has said it expects the pressure on inflation to ease off again next year. This is partly because the rise is thought to be stemming from the decline in the pound against sterling and other European currencies last year, which would have pushed up import costs. The authorities will be hoping that the relative rise in the pound's value in recent months will start to reverse this trend towards the end of the year.
So far most of the pressure has come on food prices. They have now risen by 4.9 per cent over the past year, partly because of higher import prices due to the weakness of the pound late last year and early this year.
May was also the first month for some time to see a jump in housing costs, due to rising rents and the increasing cost of repairs and decoration.
The price war in clothing and footwear also appears to be over, with prices rising by 3 per cent over the past three months, although due to the large fall last year, clothing prices are still lower than a year ago. The cost of services also rose sharply, due to higher doctors' and dentists' fees as well as rising holiday prices.
The rise in inflation also conforms with recent forecasts from the European Commission and European Central Bank as well as the OECD, all of which have warned that there is a significant risk of the economy overheating this year.
They are concerned that a generous Budget coupled with the Central Bank's inability to raise interest rates or vary the exchange rate will lead to increased inflationary pressures and further wage demands.
The Labour Party's spokesperson on Enterprise, Trade and Employment, Mr Tommy Broughan, said the inflation figure was a "serious cause for concern".