The annual rate of inflation increased to 4.2% in July from 2.5% at the end of last year and from under 2% at the start of 2004.
A note from AIB Global Treasury says that in general, prices have been rising much faster in the non-discretionary areas of consumer spending where there is little escape for consumers in terms of either the ability to avoid expenditure or to substitute for lower cost products.
AIB includes housing, energy, transport, health, education and childcare costs in its basket of non-discretionary items.
It says that the annual inflation rate for non-discretionary expenditure was 9.4% in July, if food items are excluded. It adds that though food in a necessity, there is significant scope for product substitution in this area.
This contrasts to an inflation rate of about 1.7% or 1.8% for discretionary expenditure. This includes costs for clothing and footwear, household goods, recreation and restaurant and hotel expenditure and personal goods and care.
AIB predicts that rising mortgage costs are likely to continue pressurising non-discretionary expenditure, though the impact of higher energy prices may moderate if oil prices stabilise.
The bank said that mainly as a result of continuing strong price rises for non-discretionary items, it sees the headline inflation rate continuing higher over the rest of the year to reach close to 5% in the last quarter of 2006.
Today's economic note from AIB also says that there is strong evidence of a revival in manufacturing. Recent Central Statistics Office data shows that manufacturing output was up 6.8% year on year during the second quarter of 2006. This compared to growth of 3.3% in the previous three month period.
The bank says the pick-up is being led by a solid performance from the modern sector, which is dominated by the production of chemicals, chemical products and electrical equipment including computers.
Production in the modern sector grew by 8% year on year in Q2, while traditional industries saw volume production up by only 2.8%.
