This drop could prove temporary, but even if not, it is beyond the scope of domestic monetary policy. Furthermore, it can be assumed that real wages will rise if the decline in oil prices proves long-lived, but the impact on inflation will taper off. Second, the inflation outlook is clouded by various domestic uncertainties. The slack in the economy is turning around into a positive output gap. There is far more unrest in the labour market than might be expected in view of overall macroeconomic conditions and supply and demand in the labour market. In regards to the inflation outlook, the most important factor is that some groups have demanded extremely large pay increases that would set inflation in motion again and call for a strong monetary policy response if they extended to the labour market as a whole. The third reason is that inflation expectations, which had subsided to target at the beginning of the year, have risen again in recent weeks, probably due to the unrest in the labour market. 2  BIS central bankers’ speeches  The labour market situation is both thought-provoking and a source of concern. Wage pressures that jeopardise the inflation target are generally interpreted as a sign of a positive output gap and excess labour demand, which call for a tighter monetary stance. Yet a number of factors indicate that this is not the main explanation for the current situation.

Aggregate demand, in particular, remains sluggish and insufficient to generate full utilisation of production capacities, hence exerting no pressures on producer prices, profit margins and, consequently, the final prices of goods and services. As we have constantly pointed out, below-potential economic growth is and will remain a key factor driving the low inflation. In parallel, global prices, liquidity situation in the Albanian economy and financial markets, and economic agents’ inflation expectations have not and are not expected to generate strong inflation pressures in the medium-term period. Indirect information on the performance of the Albanian economic activity in the last quarter of 2012 suggests sluggish growth. Aggregate demand was primarily driven by the higher exports, while the private domestic demand provided positive, albeit low, contribution. On the other hand, public sector expenditure shrank, hence making a negative contribution to the growth of aggregate demand. There is scarce information on economic developments during the first quarter of 2013. However, the analysis of available indirect data suggests that aggregate demand remains sluggish and economic growth below potential. Economic activity has been mostly driven by the external demand and a higher fiscal stimulus, while the contribution of consumption and private investment remains low. The latter continue to suffer from the uncertain outlook, the lower increase in disposable income, the spare production capacities, and the relatively tight lending standards. These factors have been reflected in Albanian households’ increasing propensity to save and businesses’ reluctance to invest. External demand and the favourable weather conditions increased Albanian exports by about 34.6% in January.