Dr. Robert Kelly:

I thank the Deputy for her question. I will start and Dr. O'Brien might like to add a little.

The Deputy is right in that, until this point, what we have seen in terms of immediate reaction is that profits have contributed more to inflation than wages. However, it is also important to think about the timing of this. When we see that demand and supply are at the level of imbalance that we now see in certain sectors, it would be natural to think the price pressures would come to the profits, but there could be a number of motives for this. One could be the pure profiteering that people point to, but another could be the timing of when wage pressures hit the system. If people know they are going to experience additional demand for labour in the future, they will have to pay higher wages, so it could be a timing thing. Within our forecasts, we assume there will be no increase in profit share or net profits over the projection horizon and that what will actually happen is that inflation will follow the path of wages. If it were to be the case that some of those wage pressures could be taken within the profits, then inflation would actually fall that little bit faster. However, if it were to be the case that profits remained elevated, which we will talk about shortly, then inflation would actually be on a higher path.

What we have to think about in an economy where we see a settling of demand and supply is what would be the rationale whereby competition would not compete those profits back down. I struggle to see how it would not be a temporary phenomenon. In a short period of time where we have these capacity constraints, we could see it going up, but it should compete itself away and move itself into wages. That would be my sense.