The January inflation figures have sparked a debate on whether the Republic's economy is heading for trouble. They showed that the annual rate of inflation, as measured by the consumer price index, was running at 4 per cent. Separate figures, compiled to allow comparisons across the EU, showed the Irish rate as high as 4.4 per cent. The EU Commission says it is concerned about the dangers posed to the economy by inflation, a point emphasised by Mr Pedro Solbes, the economic affairs commissioner, on a visit to Dublin this week.
So far, the debate has generated more heat than light. The economy is suffering from inflationary pressures, but many of them are not reflected in the consumer price index. The main reason why the index - and the EU harmonised inflation measure - have risen is that oil prices have increased on world markets and tobacco excise duties were increased in the Budget. The weakness of the euro on international markets has also contributed, by pushing up import prices. With the exception of the once-off impact of the excise rise, these are issues outside the control of policy-makers here. Also, they do not represent a generalised increase in inflationary pressures of a kind which would quickly undermine competitiveness.
The one area where higher demand is showing up in the consumer price index is in the services sector. The price of a whole range of services from meals out to payments for professional services are rising rapidly. But, ironically, the most worrying inflationary development - the rise in house prices and the associated increase in borrowing - is not reflected in the index. This does leave the economy vulnerable in the event of an unexpected economic downturn.
So what should be the policy response? The traditional answer would have been higher interest rates, but this option is no longer open as our rates are set in Frankfurt at the European Central Bank. So the EU Commission and some other international bodies are now arguing that the Government should tighten up budget policy by increasing taxes or cutting spending.
The small and open nature of the economy here - and the factors driving inflation upwards - mean that this would not be an appropriate remedy. To affect demand in the economy, the Government would have to push up taxes sharply and announce a hefty cut in exchequer spending. As well as being dangerous from an economic point of view, this would be impossible politically.
The key policy issue is to ensure that the higher rate of inflation does not feed into wage demands. A rash of further special claims across the public service, for example, would store up trouble for the future. And even the wage increases negotiated for the private sector in the new national programme are now causing some unease amongst employers, even though the rises negotiated do not appear excessive.
The Government must also give urgent attention to the housing market where prices are still rising, albeit at a slower rate. Spending under the new national programme in areas such as roads and public transport must go ahead because they are crucial to underpin future growth.
If the international economic outlook remains broadly favourable, there is no reason why the economy should not continue to prosper. But it is essential that an inflationary psychology - which did so much to damage our prospects in the past - does not again become part of economic life.