Retail prices fell last month, bringing inflation to only 1.2 per cent over the past 11 months.

Despite banking figures showing continued strong demand for credit and mortgages, there appears to be no follow through to inflation.

Prices fell by 0.1 per cent in July and if potatoes had not risen by 20 per cent, the overall rate would have fallen by 0.2 per cent, figures from the Central Statistics Office showed.

The excellent inflation figures remove all doubt that Ireland could fail to qualify for the single currency on inflation grounds.

The main reason for the fall is the slashing of clothing and footwear prices in the summer sales. Prices fell 6.5 per cent on the month and 9.7 per cent over the past 11 months.

While most of the fall in prices can be attributed to the summer sales, intense competition in the sector is also helping to keep prices down, generally.

Another factor could be the general reluctance of British exporters to risk market share by passing on price rises due to the strength of sterling. However, Mr Oliver Mangan, senior economist at AIB Capital Markets, said many importers and exporters would have hedged their currency exposure over the last year. "While UK exporters are cutting back on their margins, some of sterling's rise against the mark will have fed through," he said.

It is only now that they may be left in a much more difficult position and anecdotal evidence suggests there may be some feed through of prices later this year, he said.

The only serious sign of upward pressure was in the food sector. Food prices rose 0.8 per cent in July and 2.3 per cent over 11 months. Traditionally, fresh food prices increase in July as imports increase, before decreasing from August through October when the harvest comes in, Mr Mangan said. "Unless the weather badly affects the harvests we can expect those rises to unwind over the coming months." On an EU-harmonised basis prices fell 0.3 per cent in July and were only 0.8 per cent higher than 11 months ago. June inflation figures were also released for all EU countries.

Ireland was not included in the list, as we have only calculated inflation monthly since the beginning of this year. The average inflation for the three lowest countries, Austria, Finland and France amounted to just over 1 per cent. Even if Ireland's May data is used for comparison we are very comfortably placed at just 1.4 per cent.

At the same time, large-scale consumer borrowing is continuing. According to yesterday's Central Bank statistics, credit growth at the end of June was 20.6 per cent compared with 18.9 per cent in May. However, the figure was boosted by massive borrowings for the Norwich Union flotation - much of which is likely to be repaid shortly - and by large corporation tax payments.

Mortgage lending also accelerated, albeit only slightly at 14.6 per cent from 14.4 per cent in May.

However, when seen in conjunction with continuing low inflation, there appears to be little impetus for the Central Bank to either raise interest rates or seek a revaluation of the exchange rate in an attempt to check inflation.