Annual inflation surges to 4%

The annual inflation rate has jumped to 4 per cent, its highest level in 10 years. The larger-than-expected increase is likely to fuel fears that the economy is overheating and to raise concerns that it may contribute to a further acceleration in wage inflation.

If, as many analysts expect, consumer prices remain high over coming months, it would erode the benefits to workers of the proposed Partnership for Prosperity and Fairness which provides for pay increases of 15 per cent over 33 months.

The State's largest union, SIPTU, signalled yesterday that if inflation remained at the present level, it might seek a review of the agreed pay increases.

"Obviously if there was any question of it operating at that level, we would bring up the issue in the course of the review mechanism provided for over the course of the agreement," said SIPTU's president, Mr Des Geraghty.

But SIPTU also said an increase in inflation to 4 per cent had been expected given the strength of international commodity prices, and inflation was expected to fall back to 3 per cent during the year. Meanwhile, the ATGWU, which has already rejected the agreement, said the pay deal as it stood would bring only a minimal increase to the average worker.

"With commentators forecasting that inflation will rise to at least 4.5 per cent, and Irish inflation now running at twice the EU average, the lot of workers under the proposed agreement will only get worse before it gets better," said regional secretary, Mr Mick O'Reilly.

Union concerns were echoed in political circles. The Fine Gael spokesman on finance, Mr Michael Noonan, said a sustained inflation rate at these levels would quickly erode the pay benefits of the agreement. "While I expect that the pay agreement will be ratified, inflation at this level will put severe pressure on the trade union movement and the expected industrial peace will not be maintained," he said.

The latest annual inflation figures from the Central Statistics Office show the impact of the January sales on clothing and footwear prices was more than offset by higher energy prices, the increased cost of cigarettes following the Budget and higher mortgage repayments.

Irish inflation is now the highest in the euro zone at more than double the EU average and economists expect further increases in the months ahead. The stimulation of tax cuts worth more than £1 billion (€1.3 billion) announced in the December Budget could add to price pressures when they start to feed through to the economy from April.