Irish consumer sentiment slumped last month on concerns that higher living costs and a potential increase in interest rates will erode disposable income. Gabrielle Monaghan reports.

The consumer sentiment index, produced by Irish Intercontinental Bank (IIB) and the Economic and Social Research Institute (ESRI), has worsened for three of the past four months. The index fell to 92.3 in May from 98.8 in April, completely erasing that month's gain.

Annual inflation accelerated to 3.8 per cent in April from 2.5 per cent in December, weighing on consumer confidence, IIB chief economist Austin Hughes pointed out.

As oil prices hover near $72 (€56) a barrel, energy costs are particularly squeezing consumer spending power, according to the ESRI.

In addition, European Central Bank president Jean-Claude Trichet indicated in early May that there was a risk that the Frankfurt-based bank will step up the pace of interest rate increases.

This led to speculation that the ECB Governing Council will boost borrowing costs by as much as half a percentage point when it meets tomorrow.

"For many debt-burdened Irish consumers, the risk of a larger interest rate hike this month, or a long series of rate hikes stretching into 2007, would represent a substantial blow to their household finances," Mr Hughes said yesterday.

Consumer sentiment took a blow in early 2006 as news of high-profile redundancies dented job security.

The total number of redundancies recorded by the Government for the first four months of the year was 7,723, a 12 per cent jump on the same period in 2005, when the figure was 6,893.

Consumers were once again downbeat about the outlook for the jobs market and the economy in May. The Index of Consumer Expectations, based on consumers' perception of employment, the outlook for the economy, and their own future financial situation, fell to 84.8 last month from 91.4 in April.

"A strong Irish economy is not delivering a feelgood factor the way it used to," Mr Hughes said. "In particular, a buoyant job market isn't producing any significant boost to wages or even to job security."

While figures from the Central Statistics Office showed earlier this month that total employment climbed by 90,000 in the 12 months to February, the high concentration of job gains among migrants and older workers was unlikely to lead ordinary Irish workers feel more secure in their jobs, the economist noted.