Inflation fell to its lowest level in almost four years in September, the Central Statistics Office (CSO) said yesterday.

The news left economists predicting that the Minister for Finance, Mr McCreevy, would raise indirect taxes in Budget 2004 as the gap between revenue and the cost of public services continues to widen.

The Economic and Social Research Institute (ESRI) has urged the Minister to produce a "neutral" Budget in December so that the economy can once more be positioned to fulfil its growth potential.

The ESRI is forecasting weak growth over this year and next year, but sees activity picking up thereafter as international conditions improve.

Inflation is forecast to average at 3.7 per cent in 2003, before moderating to 2.6 per cent next year.

The CSO reported yesterday that the yearly rate of consumer price increases fell to 2.9 per cent in September from 4.5 per cent during the same month in 2002. This was the lowest rate of inflation recorded since November 1999, when it hit 2.1 per cent.

The CSO's consumer price index, which measures monthly and annual inflation, shows that the yearly rate at which prices have been increasing has been falling steadily since March, when it was 5.1 per cent. The only exception was August, when it rose 0.1 per cent on July to 3.2 per cent.

While economists broadly welcomed the news last night, they predicted that falling inflation would prompt Mr McCreevy to increase indirect taxes when he announces his Budget in December. Friends First chief economist Mr Jim Power said the Minister for Finance would have little choice but to do so.

He predicted that public service charges would be a key driver of inflation going forward.

"In areas such as health, refuse collection and water provision, prices will rise further simply because the Government will have no option if services are to be maintained," he said.

Mr Austin Hughes, chief economist at Irish Intercontinental Bank, predicted that Mr McCreevy would seek to raise around €400 million extra in indirect taxes in the Budget.

Business organisations, however, came out strongly against such a move, warning that it would damage the Republic's ability to take advantage of any upturn in global conditions.

Small Firms' Association director Mr Pat Delaney said that indirect charges added 1 per cent to inflation this year. He argued that this had created a gulf between the traded goods and services sectors.

He added that the Budget should aim to bring inflation to below 2 per cent next year.

Mr Aebhric McGibney, chief economist with employers' group IBEC, said the economy could achieve an inflation rate of 2.4 per cent in 2004, once there was no increase in indirect taxes.

He described the rate of inflation in public services as worrying, with education reaching 9.6 per cent and healthcare hitting 6.8 per cent. The CPI shows that utilities and local charges were up 10.4 per cent.

Last night, Fine Gael's finance spokesman, Mr Richard Bruton, said indirect taxes accounted for 87 per cent of annual inflation.

Green Party spokesman Mr Dan Boyle argued that the State was contributing more than 50 per cent to the current rate of increase.

Outside the CPI categories affected by public services, alcoholic beverages and tobacco were up 9.7 per cent on September 2002. The linked area of restaurants and hotels hit 6.1 per cent.