Professor Michael McMahon:

For anyone listening, I would certainly refer them to box A in the report, which is a nice box on the inflationary impact of the tax cuts. The estimates we have and put forward are that, without these measures next year, we would see inflation at around 2.2 and with them we estimate it will be at 2.9. It is absolutely worth emphasising that there is uncertainty around those estimates, but if I were to take a guess, my nervousness or the risk I would see is that those are the average effects of these types of policies. The effects could be much larger at a time when inflationary pressures are already high.

In regard to the effect of inflation on different parts of the income distribution, which I will use as the basis although there are others, we know that, in particular, the lower end of the income distribution spends a disproportionate amount of its money on food and energy. Therefore, particularly when it was driven by energy price increases, this disproportionately affects those groups. It is much harder to say exactly where the effects of this type of general higher inflation go. However, the anecdotal evidence at least is that those in higher earning jobs have generally tended to be able to get higher pay increases. If we simply measured it as a take-home pay after wage increases and inflation, that is, a real take-home pay change, and if a person were to get an inflation busting pay increase because he or she is in a high-skill job or it is difficult to retain him or her as distinct from a person who would get a much lower one, the effect of inflation would be much greater. I do not know whether I can go beyond that because we do not do a full distributional analysis of such inflation numbers, but that would be a reasonable way to think about it.