Ireland's inflation rate is now only the fourth highest in the EU as rising prices across the Continent boosted average inflation to 3.4 per cent from 2.9 per cent in April.

Rising food and energy prices pushed inflation up 0.6 per cent in May alone. Prices in the Netherlands, Portugal and Spain are all now rising faster than in Ireland. The rate of inflation is now at its highest level across Europe since May 1993, according to Eurostat calculations and even France, which has the lowest rate in the euro zone, exceeds the 2 per cent target.

The sharp increase in the rate effectively rules out an interest rate cut from the European Central Bank when it meets in Dublin on Thursday. With prices rising faster than 3 per cent, the Bank would further undermine its credibility if it were to cut rates this week. Even more worryingly, ECB core inflation, which excludes energy, food, alcohol and tobacco, rose above the 2 per cent limit to 2.1 per cent.

Nevertheless, many believe that interest rate cuts are needed, as officials warn that Germany risks sliding into recession. The ECB now expects the economy to grow as little as 2.2 per cent on average this year instead of the 2.6 per cent it predicted in December.

At the same time, two think-tanks slashed their forecast for German growth this year to 1.3 per cent from 3 per cent in 2000. Bundesbank council member Mr Hans Reckers also warned that Germany may fall into recession because of a dangerous cocktail of high inflation, rising unemployment and weak consumption.

"In Germany there is a dangerous negative combination of economic developments so that a recession cannot be excluded." His comments hit the euro which fell below $0.86 for a time.

A slowing economy normally brings inflation down but Europe has been hit by a weak currency, which is pushing up the cost of imports and hitting prices in shops, restaurants and petrol stations. Higher food costs, which rose 1.2 per cent in May, were one of the main contributors to the sudden rise in prices, partly the result of "mad cow" disease and foot-and-mouth. High oil prices also contributed heavily.

France had the lowest annual inflation in the euro zone, at 2.5 per cent, while the Netherlands had the highest, at 5.4 per cent. Inflation was 4.9 per cent in Portugal and 4.2 per cent in Spain. Irish inflation on the EU measure was 4.1 per cent, not far above Germany's 3.6 per cent. The UK had the lowest level at just 1.7 per cent.