Inflation dipped slightly in March but remained strong in the most sheltered parts of the economy.

Figures released yesterday by the Central Statistics Office (CSO) show that inflation fell from 2.2 per cent in February to 2.1 per cent in March.

The decline was led by the falling cost of food and drink, with prices dropping across a range of staple items. This helped overall goods prices to remain practically static on the same point of 2004.

Services inflation, however, was a different matter, with prices in this half of the economy rising by 3.8 per cent over the year. Price increases were particularly striking in sectors linked to the Government such as water, electricity and health.

Bloxham chief economist Alan McQuaid estimates that inflation would be running closer to 1.5 per cent if Government-linked service charges were excluded.

This trend in services prices prompted stern criticism of the Government from both opposition parties and business groups.

Richard Bruton, Fine Gael's finance spokesman, said the CSO figures showed that consumers are being caught "on the double" by rising living costs imposed by the Government and a "ruthless" tax policy that does not keep up with inflation.

"Ireland is still the most expensive country in Europe and the new inflation figures show that this position is becoming entrenched," he said. Small business lobby group, Isme, welcomed the overall decline in inflation but warned against Government complacency on prices.

"It is no coincidence that areas of the economy with the least competition and under State control are continuously responsible for the highest increases in the inflation rate," Isme's chief executive, Mark Fielding, said.

A breakdown of the CSO numbers shows that double-digit inflation was recorded in numerous areas related to housing. The largest such increase came in the cost of water supply, refuse collection and other services, where prices rose by 36.4 per cent year-on-year. By contrast, most basic foodstuffs were cheaper in March than they were a year ago. Prices for bread and cereals, for example, fell by 0.7 per cent, while poultry prices declined by 1.6 per cent.

Dr Dan McLaughlin, chief economist at Bank of Ireland, pointed out that Irish inflation is now below the euro zone norm when mortgage costs are excluded. This is unusual, he said, since the Republic's higher rate of economic growth could have been expected to lead to higher inflation too.

Bank of Ireland has lowered its inflation forecast for the year to 2 per cent. Austin Hughes, chief economist at IIB Bank, has gone in the opposite direction however, raising his inflation outlook from 2.2 to 2.5 per cent to reflect the likely impact of higher oil prices.