Inflation unexpectedly fell back below 5 per cent last month, pushed down by heavy discounting at winter sales and lower mortgage repayments for homeowners.

The move, which saw the headline rate fall from 5 per cent to 4.8 per cent, came as a surprise to analysts, many of whom had been expecting inflation to rise as high as 5.5 per cent in January as the full effects of December's budget were felt.

A 13.7 per cent monthly decline in the cost of clothing and footwear came as the biggest surprise.

Mr Jim Power, chief economist with Friends First, said strong retail sales growth in a period of radical discounting was indicative of consumer worry over job and wage prospects.

Despite reducing his inflation forecast for the year from 4.9 per cent to 4.7 per cent, Mr Power believes the underlying picture for price growth is not positive.

Mr Austin Hughes, chief economist with IIB Bank, agreed that the decline was not "unambiguously good news for the Irish economic outlook".

He argued that last month's move was driven almost entirely by external factors such as December's cut in euro-zone interest rates, and thus did not reflect an unwinding of domestic cost pressures.

Average inflation has been rising steadily since the middle of last year.

The most substantial annual price increase recorded last month came in alcohol and tobacco, where inflation hit 11.7 per cent.

Education saw prices grow by 10.2 per cent, while increases in hospital charges and changes to the drug payments scheme brought inflation in the health sector up to 7.9 per cent.

These "stubborn increases" will hit competitiveness and cause a significant weakening in the economy this year if not stemmed now, Mr Hughes warns.

He has also cut his 2003 average forecast, from 4.9 per cent to 4.3 per cent.

Employers' body IBEC welcomed January's drop in the headline rate yesterday, predicting that it would decline to 3 per cent by the end of the year.

Such a trend would, at least from the trade union perspective, raise the appeal of the forthcoming social partnership agreement, as it would result in workers being more than compensated for inflation.

"The unions might be getting a better deal than they thought," according to Mr Robbie Kelleher, head of research with Davy Stockbrokers.

Mr Kelleher is more conservative than most economists on inflation forecasts, predicting that interest-rate movements in the euro zone will drive the 2003 average down to 2.5 per cent.

He argues that a single cut of 25 basis points in the ECB rate could push the headline inflation rate below 2 per cent before the summer.

A cut of one percentage point would leave inflation struggling to move above 1 per cent by the end of the year, he said.

The political opposition was reluctant to welcome the reversal in inflation yesterday.

Fine Gael finance spokesman, Mr Richard Bruton, said the decline in the headline rate masked "the damage done by the Government to price trends in Ireland".

"It is quite clear from today's figures that the Government is now the main engine keeping up inflation in Ireland," Mr Bruton added.

Labour's finance spokeswoman, Ms Joan Burton, said the figures highlighted "the extent to which working families are being hit by this dishonest Government".

Green Party finance spokesman, Mr Dan Boyle, said the clearest indication of current trends could be found in education and health inflation.

On the Harmonised Index of Consumer Prices (HICP) - the measure favoured by European Union authorities - inflation in the Republic came in at 4.6 per cent in January, twice the euro-zone average. Mortgage interest payments are excluded from the HICP figure.