Wage increases above those agreed in the Programme for Prosperity and Fairness (PPF) rather than tax cuts have been identified by three leading economists as the appropriate response to the inflation problem.

Although Prof Kevin O'Rourke and Prof Rodney Thom, and Dr Patrick Honohan disagree on the main cause of Ireland's current inflation, they conclude that it is through wage increases that workers can most appropriately be compensated.

Writing in the current issue of the Irish Banking Review, they imply that, from a purely economic perspective, taxes should be increased.

According to Prof O'Rourke and Prof Thom, Ireland's inflation is largely the result of excess demand pressure rather than cost-increasing, supply-side shocks. While both believe the textbook remedy for the problem is a combination of tax increases and/or expenditure cuts, they said that such an approach would be politically unacceptable and pose real threats to social partnership. It made more sense to compensate workers for the unexpected rise in inflation by raising nominal wages, they said.

The weak euro explains most of the surge in inflation, according to Dr Patrick Honohan. Acknowledging that Ireland's increased inflation had affected workers' living standards, Dr Honohan saw wage increases as the appropriate policy response.

The economy is probably much more vulnerable to a shock in the US economy than one affecting just the UK economy, according to Mr David Duffy and Prof John FitzGerald, also writing in the review. The principal reasons given are: the appreciation of sterling since 1997; the decline in dependence on the UK as a destination for Irish exports; and the increase in export and import dependency in Ireland's trade with the US and Canada.