The Central Bank has issued its strongest warning yet on inflation which it predicts will average at least 4 per cent next year, almost twice the Government's forecast.
The Bank has also urged the Minister for Finance, Mr McCreevy, to deliver a broadly neutral Budget in December but has conceded he is unlikely to do so, given the Government's spending commitments and unprecedented pressure on the Programme for Prosperity and Fairness (PPF).
It has also warned of the impact of a wage-price spiral which could leave the economy vulnerable to external shocks.
The Bank's inflation forecast will raise new doubts about the future of the national agreement, but the Taoiseach maintained last night that 4 per cent was "liveable with for the time being".
Mr Ahern also said the Government would do more in the Budget and in its consultations with the social partners to curb inflationary pressures, which should prevent the economy from getting into an inflationary spiral.
The Taoiseach was speaking at the opening of new Commerzbank offices at the International Financial Services Centre in Dublin where Dr Heinz Hockmann, a member of the bank's board of managing directors, also warned that inflation could erode the competitiveness of industry here.
The Central Bank, in its quarterly economic commentary, said rising inflation - reflected in house prices, growing wage demands and congestion - was building momentum.
High oil prices and the low value of the euro were exacerbating the situation and could see inflation exceeding the 4 per cent forecast, according to the Bank's head of economic affairs, Mr Tom O'Connell.
The Bank's forecast is based on wage increases in line with the PPF as well as a "broadly neutral" Budget.
The Bank is estimating that wages will grow by 7.5 per cent this year and by 7.75 per cent next year, ahead of the 5.5 per cent negotiated under the PPF.
Mr O'Connell said this was the usual degree of overrun on all recent partnership agreements.
He also admitted that the assumed Budget position may not be the most likely, given the tax and spending commitments which the Government has entered into under the PPF and the Programme for Government, as well as the National Development Plan.
He warned that rising wages could lead to a wage-price spiral if increases could not be justified by productivity gains.
He also noted that many indigenous firms could face problems if they had to pay higher wages.
"It also leaves the economy vulnerable in the event of a shock such as a rapid depreciation of sterling," he said.
Rising inflation, the Bank added, would diminish the attractiveness of Ireland as a location for foreign direct investment, although for now continuing huge productivity gains among multinational firms in particular meant competitiveness was still growing.
Apart from internationally generated price pressures, the Bank noted that so-called services inflation was rising even more rapidly. Bank warning on giveaway Budget: Business This Week