The Government and social partners are likely to take comfort today when last month's inflation figures, showing a fall, are published.

Following a year when prices seemed to be on an inexorably upwards path, falling inflation will be welcomed. Just last month the social partners warned that the partnership agreement would have to be renegotiated again if inflation did not begin to dip. At that stage most economists were predicting a turnaround and now most expect the consumer price index (CPI) to fall below 6 per cent today, declining again in February when this month's figures are published.

This improvement in the inflation figures does not mean that the problem has disappeared. There are still considerable domestic price pressures on inflation, but as the Finance Minister, Mr McCreevy, has consistently pointed out, the main detriments of our inflation rate are external.

Last year, the key factors in the inflation rate were a combination of high oil prices and a deteriorating euro. Oil prices have begun to fall although this week they moved upwards as OPEC met in Vienna to announce a cut in production.

However, most analysts expect prices to average around $25 (€26.60) a barrel this year and OPEC members have indicated that they would be happy with this price level. A higher average price could put a strain on the already vulnerable US economy, leading to an easing of demand, something that OPEC would not want.

The euro's fortunes also appeared to have turned for the better - at lest for now. The US economy's slowdown is a contributory factor. The weak euro was more a result of the US economy's strength and dollar assets than it was about a weak euro zone economy. How this will pan out over the remainder of the year is anyone's guess but most market watchers expect the euro to reach parity with the dollar in the first half of this year.

It is possible that this trend could be reversed in the latter part of the year, if the US economy regains momentum.

Some of Wall Street's most respected economists, including Mr Stephen Roach of Morgan Stanley Dean Witter, are already saying that the US economy is in recession. Mr Roach is known for his grand statements but, nonetheless, a recession in the US cannot be ruled out.

That would lead to further upward pressure on the euro, reining back the price of imported goods and putting downward pressure on inflation in all euro zone economies.

Two other influences on Irish inflation last year are expected to be reversed this year. The £0.50 (€0.63) increase on cigarettes in the 2000 budget put around three-quarters of a percentage point onto Irish inflation. By simply leaving the price of cigarettes unchanged in this year's Budget, Mr McCreevy ensured that inflation would fall by this amount. The first signs of this move will be seen in today's figures.

Rising interest rates also affected inflation last year as mortgage repayments rose. The US has already cut interest rates and, while the European Central Bank (ECB) has yet to follow suit, most commentators expect it will do so over the coming months - perhaps at the council meeting in Dublin on March 16th.

That will lead to lower mortgage repayments, which will again ease the pressure on the CPI. Fixed-rate repayments have already begun to fall and in many cases are around the same level as variable rates. However, average inflation for the euro zone at 2.9 per cent in November is still above the ECB's upper ceiling of 2 per cent and, thus, it may take some time to cut rates.

Overall, economists such as Irish Intercontinental Bank's Mr Austin Hughes expect inflation to average 4.5 per cent to 4.75 per cent this year. But of course, all this masks the continuing trend towards higher prices in the domestic economy.

Services in particular are becoming increasingly expensive. Rapidly rising incomes and a massive tax-cutting package in the offing means eating out, hairdressing and childcare are unlikely to decline in price this year.

These diverging influences could lead to problems for the economy.

A slowdown in the US will feed through to some extent in Europe and to Ireland, leading to lower growth and some problems for exporters as competitiveness pressure intensifies. Increasing domestic costs will add to the problem.

As Mr Jim O'Leary, chief economist at Davy Stockbrokers, has pointed out, a declining CPI does not mean that inflation is not a problem. He points to the problems with congestion, which are not measured by the Central Statistics Office.

These range from traffic jams, to queues, to house prices and a shortage of houses. None of these problems will disappear simply because the measured rate of inflation is falling.