Viagra to be included
The revamp of the consumer price index in Cyprus due from January 2006 could raise the rate of inflation, and with it the index-linked wage bill, fear Cypriot business groups, who fear a price-wage spiral.
The consumer price index is revamped every few years to take account of changing spending habits. The current index, with a base of 1998=100, will be replaced by 2005=100 from January.
Revisions to the index will be based on the Family Budget Survey conducted in 2003, which shows how much households spend on every-day items.
Officials at the Statistical Service have recommended the inclusion of more than 150 new items in the index, including Viagra, condoms, hair gel, depilatory wax and visits to orthopaedic surgeons. The final changes will be known after a meeting on December 5.
However, the alteration that is worrying business is that fuel prices will have an extra weight in the index to reflect the proportion of household budgets spent on fuel.
Fuel prices primarily affect the categories of “housing, water electricity & gas” and “transport”.
Cyprus has virtually no public transport, more than 95% of electricity is generated by oil and central heating also runs off diesel, therefore fuel already has a heavy weighting in the consumer price index.
Even before the revamp, the housing, water electriciy and gas category has the highest weighting in the index, at 21.27%, while transport is the third highest (after food beverages and tobacco) at 17.42%.
Given the almost universal application of wage-indexation in Cyprus, business fear that this will lead to a big increase in the wage bill.
A related issue is what it will do to Cyprus’ plans for adopting the euro in January 2008.
The government is planning to abolish road tax in favour of an increase in petrol and diesel prices. If this and the revamped index push inflation up well into 2007, Cpyrus could find that it fails to meet one of the four Maastricht criteria for adopting the euro.
In order to meet the inflation criterion, EU-harmonised consumer price inflation in Cyprus must be no more 1.5% above the three EU member states with the lowets inflation rates.
The assessment is likely to take place in mid- to late 2007.
This means that if they record inflation of 1.5% in the 12 months before the assessment, Cyprus’ inflation must be no more than 3.0% in the same period.
At the moment, Cyprus is on course, with 12-month harmonised inflation of 2.3% in January-October 2005. However, inflation has been creeping up for several months and the 12-month rate is expected to carry on rising.
Fiona Mullen
