Inflation expected to moderate following 16-year peak of 7%

Inflation has risen to the highest level in more than 16 years coming in at an annual rate of 7 per cent in November.

The increase, which compares with an annual rate of 6.8 per cent in October, had been expected and most analysts suggest prices in the Irish economy will fall in the coming months.

Most believe the rate of inflation will drop to below 5 per cent in 2001 with mortgage rates relatively stable, oil prices falling and the euro getting stronger.

Higher mortgage repayments were the main factor driving the latest increase in the official rate of inflation, while higher rents in the private sector also pushed the index higher last month. Transport costs were more expensive with the cost of motor insurance, repair and maintenance services and spare parts rising. Other items getting more expensive are magazines, comics and food.

The price of pork, bacon, fresh fruit, vegetables and sweets all continued to rise, while the cost of dining out has also increased. Some foods did get cheaper though, including beef and potatoes. Reductions in telephone charges helped to reduce the rate of increase in the price of other services and general spending but were not sufficient to offset the higher cost of education, training and medical costs, according to the Central Statistics Office.

Fine Gael finance spokesman Mr Michael Noonan said the rate of inflation was now "seriously worrying" and was running at three times the European average. "Only 13 months ago the rate of inflation in the Irish economy was 1.5 per cent" he said.

Labour Party TD Mr Eamon Gilmore dismissed suggestions that the rate of inflation would move to an acceptable level over the coming months. "The recent Budget provided no assurances that inflation will not continue to eat into the success of our economy over the coming year. In fact, the likelihood is that inflation will not fall below 5 per cent next year. This is a very disconcerting scenario for our economy."

Economists expect the rate of inflation to fall sharply in December as the increase in excise duty on cigarettes in last year's Budget drops out of the index.

AIB Capital Markets economist, Mr Oliver Mangan, said the main factors pushing inflation will reverse or abate next year. "The European Central Bank seems unlikely to alter monetary policy markedly in 2001, suggesting broadly stable mortgage rates." Mr Mangan also forecasts a fall in the price of oil to below $25 a barrel from its peak of $35 last autumn. For 2001, AIB says the headline rate of inflation will average just over 4 per cent, while the core rate should reach 3.7 per cent.

Dr Dan McLaughlin, chief economist at ABN Amro, agrees 7 per cent should mark the peak in Irish inflation rates. In December, Dr McLaughlin believes the inflation rate will fall to 6 per cent, moving below 4 per cent in 2001. "A lower figure is conceivable if oil prices fall further, the euro rallies and the interest rate declines," he said yesterday.

Mr Alan McQuaid at Bloxham Stockbrokers is also suggesting a rate of 4 per cent next year. He admits, however, that there is a risk that measures like reducing excise duty or VAT on various goods and services will not address the underlying price pressures in the economy.

"If Ireland's inflation rate were to remain at an excessive level for a prolonged period of time, the competitiveness of the economy would eventually be seriously impaired, with the indigenous sector most at risk."