The Small and Medium Enterprises Group says inflation is likely to top 6% by Easter.
ISME's head of Research, Jim Curran, says the Government must reverse the budgetary increase in VAT.
He said: "What we are hoping is that Minister McCreevy will reverse the increase in VAT that was announced in the last budget and reverse this with the finance bill coming up next month.
"This should help alleviate what is a desperate situation for many businesses at present."
The annual inflation rate has now reached 5%.
It follows increases in the price of drink and cigarettes in last month's budget.
Eating out, hotels and utility bills have also increased.