Professor Michael McMahon:

I think the Deputy is right. There is a risk. There were excess savings through lockdown where people were constrained from being able to spend rather than choosing not to. We know these are very unevenly distributed across the distribution of households. They tend to be focused in households towards the higher end of the income distribution that did not see disruptions to their work and earnings. The unwinding of those savings could provide a stimulus to the economy. The risk is that at a time of supply constraints, as we have seen, those excess savings could result in inflation. Part of what we are seeing around inflation, not only in Ireland but in many advanced economies, is that the combination of the increased demand as restrictions ease - this remark may be impertinent as we start to see restrictions and lockdowns reintroduced - people got out and spent but they did so in sectors that were constrained. Some elements of the inflation we have seen are driven not by demand at all but by supply constraints. Let us take energy and the oil and gas prices, which have gone up and stayed reasonably high for many months. Now we have entered winter and it has started to get cold, they have become more of a burden. In some ways, some households having excess savings will be a useful way for them to pay for these higher costs. That is not so advantageous for the economy because it ultimately feeds out into the energy producers. However, there are differences across sectors where these supply constraints means more or less. It is quite a complex picture and one that we will watch. Taking the view of the European Central Bank, a concern is that the higher inflation that we are seeing would become baked in and live in inflation expectations and, therefore, lead to higher interest rates. We have discussed how low interest rates help the Government and households to deal with the current situation. It is something to watch but the ECB has so far been very explicit that it views these increases in inflation as transitory. It will stand ready and watch. However, at the moment, the best guess is that unless we see something very marked, we should expect inflation to come down albeit not immediately and certainly not next year. It will definitely be a strain on the recovery but probably helped by the excess savings that the Deputy mentioned.