Inflation rises to 1.7% as oil prices surge

Surging oil prices drove the annual rate of inflation up to 1.7 per cent in May, breaking a downward trend for the first four months of the year.

Amid continued global instability there are fears that the high cost of oil - which has struck a 14-year high over recent weeks - may put prices under further pressure in June.

Petrol prices increased by 3 per cent, home heating oil by 5.7 per cent and diesel by 2.6 per cent last month.

The result was a 0.2 per cent monthly rise in prices in May, compared to a 0.4 per cent rise the previous month.

Apart from the knock-on from rising oil prices, the main contributor to inflation last month was a 0.5 per cent monthly increase in restaurants and hotels, due to higher accommodation costs and higher prices for meals out.

Food prices also rose 0.5 per cent.

A Eurostat survey earlier this week showed that food prices here were already at the top of the euro zone league.

A breakdown of the figures for the past year shows alcohol and tobacco prices up at an annual rate of 3.6 per cent, transport up 3.5 per cent - reflecting the oil prices rise - restaurant and hotels up 3.3 per cent and furnishing and household equipment down 1.7 per cent.

However the fastest rate of price increases remains in areas in which Government policy plays a key role, with education costs up 6 per cent and health inflation running at 5.8 per cent.

The cost of local services such as waste and water are also rising sharply.

The annual rate of inflation has now climbed in two successive months from a low-point of 1.3 per cent in March and looks set to continue higher, with analysts predicting that it will soon go back above 2 per cent.

Should current trends continue the annual rate could hit 2.5 per cent in the months ahead , said Mr Jim Power, chief economist with Friends First.

However, he said that it was too soon to predict by what level prices would rise in June. "The bulk of the increase in oil prices will have been seen in May, but there is likely to be a further impact in June, but the extent of the impact will obviously depend on the trajectory of oil prices over the coming weeks," he said

An inflation rate of 2.6 per cent was possible for the year, largely because of the oil crisis, according to Mr Dermot O'Leary, of Goodbody Stockbrokers.

He said:"The inflation rate will continue to trend upwards as the year progresses, due to base effects and the imp act of energy prices."

The small business lobby said the figures were a concern. Mr Mark Fielding of ISME, a pressure group for small and medium sized companies, said: "With many analysts predicting oil prices remaining at the current high levels or increasing further, the likelihood is that inflation will continue to increase in the coming months, with the resultant negative impact on the economy."

Cutting VAT on petrol might alleviate some of the pressure on prices, he suggested.

Opposition politicians said the inflation showed government fiscal policy to be misjudged and short-term.

Labour consumer affairs spokeswoman Ms Kathleen Lynch, said petrol companies were wrong to blame higher pump prices on the oil crisis as supplies were bought months in advance. Higher prices could damage tourism, she added.

Fine Gael said Government policy was as much to blame as rising oil prices.

The party's finance spokesman Mr Richard Bruton said: "While rising oil prices are clearly now a threat to price stability in Ireland, we should not forget that the energy price rise accounts for less than a quarter of the 1. per cent rate of inflation for the last year.

The rest is a direct result of Government-driven increases in indirect taxes and the price of State utilities."