Mr. Sebastian Barnes:

It is a genuinely complicated question, partly because we have not had inflation like this for a generation. Many things have changed in between. We do not really know what it will be like in the current environment or how people will respond. A lot of it ultimately comes down to human behaviour and expectations and things that are very hard to get to the bottom of. There are two channels through which wages would be increasing. As we have seen, since the onset of the pandemic there are labour shortages in some sectors. That would naturally bid up the wages. That is more like a conventional overheating but it is relative to some sectors, including construction and areas like that. A special feature in the Irish case is that there are some sectors linked to the digital and pharmaceutical industries, which have very high wage growth for reasons that are totally unrelated. It is really to do with global factors. That is a permanent increase but it means the average wage rate does not mean very much because it is a combination of all sorts of different wage rates at totally different levels and with totally different growth rates. It is a very hard thing to think about.

We have already produced a note on the matter, but it is something we are thinking about much harder because it is becoming a big reality for the Government.

When people set their wages, they may anticipate a level of inflation and want to be compensated for that. The question is what level they anticipate. If they think everyone else is going to raise their wages, and by consequence companies also raise their prices, they will ask for more. We do not want to be in the environment where everybody is bidding up relative to everyone else because there will just be higher inflation. That will not really achieve very much and it means there will be higher inflation just to stand still, in a sense.

A big question for Ireland is also what happens relative to other countries. If other countries in the eurozone have the common currency, we need, in a way, to keep an eye on what is happening in those countries. If they did not raise their wages very much and we raised ours by a lot, our relative prices would increase by a lot and we would lose competitiveness. We also need to look at that fairly carefully.

In terms of what this means, as we said earlier, this is an energy price shock and it is imported goods that have increased so we cannot fully compensate that through wages for everyone. We would just lose our competitiveness if we did so.