Oireachtas Joint and Select Committees

Wednesday, 24 November 2021

Committee on Budgetary Oversight

Inflation: Discussion (resumed)

Mr. Gabriel Makhlouf:

I will ask Dr. Cassidy to come in on this. The reality is that the institutional framework we have in place today, at central banks and in the way wages are set, is quite different from what it was 40 years ago when central banks had less independence and where wages were set in different ways. I am aware that increasingly a lot of people cannot remember the 1970s, but some of us can. In the 1970s there was a much quicker response between inflation being seen and wages being increased to compensate for them. As a result, we had that sort of close connection, such as I described earlier with a price-wage spiral. Central banks did not respond fast enough, or I should say that monetary policy did not respond fast enough, to deal with that. With the world we are now in, however, central banks have independence to deal with that. Partly because we have had such low inflation for such a long time there is less of that sort of connection between inflation appearing and wages responding immediately to it.

Monetary policy itself, the raising and lowering of interest rates, has quite a lag before it has an effect. If for some reason we woke up tomorrow and came to the view that actually inflation was going to persist, some of the actions we take now would take some time to feed through. Perhaps Dr. Cassidy will talk about what sort of evidence there is, to respond to the Deputy's question.


No comments

Log in or join to post a public comment.