Gabriel Makhlouf: Labour market dynamics and the inflation outlook

Remarks by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland, at the University of Galway, Galway, 21 September 2023. 

The views expressed in this speech are those of the speaker and not the view of the BIS.

Good morning. It is a pleasure to be here today to talk about the outlook for the labour market and inflation. My thanks to Professor Alan Ahearne for the invitation, and I look forward to the discussion afterwards and the audience Q&A. 

After reaching double digit figures late last year in the euro area – and almost double digits in Ireland – inflation has eased in recent months. 

The initial falls in 2023 were substantial, largely reflecting last year's energy and food price shocks falling out of the baseline (Figure 1a).  

However, at 5.2 per cent in August in the euro area and 4.9 per cent in Ireland – more than double our 2 per cent euro-wide target – inflation remains too high.   

In recent months, disinflation has slowed and core inflation – that is, excluding food and energy prices – has fluctuated in a tight range around 5.5 per cent throughout 2023 (Figure 1b).  There is clearly more work to do in order to return inflation sustainably to our 2 per cent target, and in a timely manner.   

The calibration of our monetary policy will be increasingly focused on domestic drivers of inflation. This is where the labour market, and wage developments in particular, play a significant role in our deliberations.

Today I will give an overview of recent labour market developments, and why these matter for wages and inflation, drawing on recent projections from the Central Bank of Ireland and the ECB.

If I was to sum up post-pandemic labour market dynamics in one word it would be resilient. Labour demand has proved resilient, with total employment showing little scarring from the pandemic. Labour supply has also proved resilient. Neither the euro area nor Ireland experienced the large fall in their labour force that we saw in the likes of the US and UK.  In fact, the size of the labour force in Ireland is far above pre-pandemic trends.