Oil price rise pulls inflation to 2.3%

INFLATION rose sharply by 2.3% in June, up 0.6% from the more modest 1.7% annual rate in May, yesterday's Consumer Price Index showed.

Worse may follow and the annual inflation rate could hit 3% by the year end, economists fear.

Increases in petrol, diesel, home-heating oil, average mortgage interest repayments, alcohol and hotel accommodation were the main changes last month.

Alan McQuaid, economist with Bloxham Stockbrokers, warned of rockier times ahead should the Government add to inflationary pressures in the Budget in December.

The impact of Government indirect taxes and service charges is likely to add 0.5% to the cost of living this year, against 1% on last year's overall inflation figure, he added.

The Government could add significantly to the pressure on prices if it were to slap higher duties on petrol and cigarettes, he said.

McQuaid warned that a lack of caution could push the inflation figure back up to 5%, a level it has not hit since February 2003.

"Widening the tax bands would not be sufficient compensation. And workers would most likely demand a change to the national pay deal to compensate for the erosion of their living standards," he said.

Oil price trends will be a key factor on prices in the coming months.

Recent easing will only be temporary as global demand for oil starts to rise, Mr McQuaid warned.

"Domestic inflationary pressures are on the increase and we now think that the headline inflation rate will end the year at above 3.0%," he said.

Overall, Mr McQuaid is forecasting a 2.25% average inflation rate for the year, down from 3.5% in 2003 and 4.6% in 2002.

Fine Gael spokesman on Finance Richard Bruton said the figures renewed pressure on households.

Failure to index tax bands and thresholds in Budget 2004 meant the average household is likely to contribute an extra €2,200 in tax this year, he claimed.

Unless the Government takes concerted steps to deliver value for money, inflation will continue to erode the living standards of citizens, Mr Bruton added.

IBEC's chief economist, David Croughan played down last month's heavy increase in inflation.

"While fuel costs have gone up by over 16% this year, other prices are falling. General food prices are 0.1% lower than a year ago, clothing and footwear prices 2.6%, furnishings and household equipment were 1.4% lower and the price of miscellaneous goods and services are down 1%," Mr Croughan said.

Jim Power, of Friends First, agreed the oil factor was key to last month's increase but said nevertheless the figure was "disappointingly high".