To write about Irish inflation at a time when the world economy is under threat of a severe slowdown might seem like discussing the risks of sunburn while March gales hammer at the window. Clearly, the global climate will put downward pressure - in many instances severe downward pressure - on the prices of goods imported into this country.

But it does not follow automatically that inflation will cease to be an issue. Emerging economic problems abroad will alter both the nature and extent of inflation problems at home.

As costs abroad tumble, the key question becomes whether domestic costs are rising at a sustainable pace. I believe domestic cost growth may have to moderate considerably.

How easily this comes about will determine how much the Republic's economy suffers from the international downswing. It seems clear that external factors will bear down on the State's inflation rate as 2001 progresses. As a result, headline inflation may be around a percentage point lower than last year's 5.6 per cent outturn. Some may interpret this modest improvement as suggesting that previous concerns about inflation were unfounded.

I think there are risks that an international downturn and continuing domestic inflation problems could worsen the longer-term outlook for this economy. It is important to be clear about what we mean when we talk about inflation. Without question, a weak global economy will exert forceful downward pressure on the price of many goods bought in the Republic.

For example, substantial over-capacity that emerged in the wake of the Asian crisis a couple of years ago still weighs on clothing prices here. The more critical issue is that a global downturn will not directly reduce the cost of producing goods and services in the Republic.

Standard economics textbooks tell us that Irish producers must adjust to a more competitive marketplace abroad. Unfortunately, these same textbooks don't offer much guidance as to how much pain that adjustment process might entail. Although the sharply rising trend in domestic costs in recent years is unlikely to be sustained in the face of a harsher global climate, it is not obvious that domestic cost pressures will simply melt away. It may well be that the adjustment process will be altogether more painful, and will involve a substantial weakening of activity and employment in the years ahead.

The notion that domestic costs may need to adjust to a harsher climate abroad is fairly straightforward. However, attempts to measure the scale of adjustment likely to be needed are not. We know that the Republic's economy became super-competitive in the past decade but it is impossible to gauge how much of a competitive cushion we now enjoy.

This is partly because of data limitations. More fundamentally, it is because competitiveness requirements are not constant. They shift dramatically as world conditions change or exchange rates fluctuate. The speed of the recent global downturn is a worrying case in point. It does not seem unreasonable to suggest that the current trajectory of domestic costs might be unsustainable. Average earnings growth may be 12 or 15 per cent this year and non-wage costs also continue to rise rapidly.

The key issue facing the State's economy centres on how quickly and how far increases of this magnitude could be scaled back if the current international downswing were to intensify.

Although the Republic's economy is exceptionally flexible, I would hazard a guess that a substantial adjustment, say to a pace of cost increase below 5 per cent, would not occur quickly and might not come about without extreme pain. This is because sharply rising expectations in relation to living standards have become deeply entrenched right across the economy in recent years. It would probably take a significant weakening of domestic activity and employment to provoke a substantial scaling back of these expectations. I would also be concerned that the prospective easing in the cost of living would not be as dramatic as some envisage.

A still problematic inflation rate could militate against a substantial scaling back of wage and other domestic cost increases. One notable feature of recent consumer price data has been a rising trend in food prices. The likelihood is that food prices will accelerate further in the months ahead because of the foot-and-mouth crisis and increases in a range of foodstuffs reflecting the euro's continuing weakness.

Add to this a litany of domestically produced goods and services - including drink, housing costs, insurance charges, hairdressing and childcare - where prices remain under upward pressure. Prices in these areas may not adjust readily to poorer economic conditions abroad. The weaker global economy will produce a significant slowdown in the State's GNP growth this year. I believe the outturn, in the region of 6 per cent, will be slightly more than half that seen last year.

Beyond this year, the risk is that the global economy will be less supportive than previously, as US growth may remain lacklustre. How quickly domestic cost increases adjust may determine whether this year's slowdown is merely a temporary blip or the beginning of a notably weaker period for the Republic's economy.

Austin Hughes is chief economist at IIB Bank.