The rate of inflation has fallen to a two-year low of 1.3 per cent, despite higher oil prices, according to the latest data from the Central Statistics Office. However, economic forecasters believe that the inflation rate is set to rise over the rest of the year as the weakness of the euro feeds through to higher import prices.

The annual rate of 1.3 per cent at the end of June was marginally below expectations and compared to 1.5 per cent the previous month. Looking at the monthly increase, prices as measured by the consumer price index rose by 0.3 per cent in June following consecutive increases of 0.5 per cent in April and May.

The core inflation rate, excluding mortgage interest, also fell to 2.4 per cent in June from 2.6 per cent the previous month. On an EU-harmonised basis - a calculation allowing price developments here to be compared with those elsewhere in Europe - inflation was running at 2.1 per cent from 2.3 per cent in May.

The June figures are likely to mark the low point of inflation for the year, analysts believe. Higher oil prices and the strength of the dollar were one of the main reasons for price rises in June. Dr Dan McLaughlin, chief economist at ABN AMRO, pointed out that oil prices had risen by 50 per cent in dollar terms since the beginning of the year and by over 80 per cent in euro terms, which had begun feeding into the index. Transport, for example, rose by 0.4 per cent, reflecting higher petrol prices.

Food prices also increased, albeit at a slower rate than last year. Food generally rose by 0.6 per cent, driven by higher prices for fresh fruit and vegetables, while drink prices rose by 0.4 per cent.

Dr McLaughlin said deregulation benefits were also becoming apparent in some sectors. For example, lower charges for domestic phone calls helped partially to offset the higher costs of package holidays in the service inflation category, where prices overall rose by just 0.1 per cent in June.

The main reason for subdued inflation is that the bulk of the index reflects world price trends, which have been low for some time. Clothing and footwear is 6.5 per cent cheaper than it was at the same time last year, while durable goods - such as fridges and washing machines - are 0.4 per cent cheaper. Housing is a major contributor to holding down the headline consumer price index rate, with costs 10.9 per cent cheaper than last year due to the large-scale cuts in mortgage interest.

However, according to analysts, the inflation rate is likely to pick up as higher oil prices feed in. As a result, the annual rate will be running at 2.8 per cent by the end of the year - or possibly even slightly higher - ABN AMRO believes, although the average for the full year will be only 1.9 per cent.

At the same time, if Europe's economies were to pick up and lead to a recovery in the fortunes of the euro, then the inflation rate here would be likely to dip back.

The gap between Irish inflation and that in the main euro zone economies is likely to widen, according to Mr Austin Hughes, chief economist at Irish Intercontinental Bank. German inflation at the end of June was running at an annual rate of 0.4 per cent, while French inflation was only 0.3 per cent. Spanish inflation, on the other hand, was 2.2 per cent.

Mr Hughes said the difference was likely to widen as the weakness of the euro against sterling fed through to Irish prices. Already there was some evidence that book and magazine prices were rising and this was likely to accelerate later this year.

Clothing and footwear is an exception, given the high level of competition and the price policy employed by many chains, which is comparable with that of the UK.