Cyprus inflation on course for the euro

Results for harmonised consumer price inflation in December show that man cannot live by consumer price inflation alone, especially when he is hoping to adopt the euro.

Cyprus’ harmonised consumer price inflation rate for the whole of 2005, based on the EU-compatible harmonised consumer price index (HICP), came in at 2.0%. This is rather lower than the consumer price inflation rate, based on the national consumer price index (CPI), which came in at 2.6%.

Cyprus’ HICP rate of 2% was also lower than the eurozone HICP rate of 2.2% according to the Eurostat’s ‘flash’ estimates. Cyprus appears well on course, therefore, to meet the Maastricht inflation criterion for adopting the euro.

When the EU institutions, probably in mid to late 2007, come to decide on whether Cyprus has met the inflation criterion, they will use the harmonised inflation rate as the reference, not the better known (and higher) consumer price inflation rate.

The harmonised and national consumer price inflation rates differ because the weights for each category are not the same and also because some things are counted in one index that are not counted in the other.

According to the Maastricht rules, the harmonised inflation rate (HICP) must be no more than 1.5% percentage points above the three best performers elsewhere in the EU (not just the eurozone), although countries with deflation are excluded.

For example, if the lowest three HICP inflation rates in the EU are 0.8%, then Cyprus’ HICP inflation rate must be no more than 2.3%.

The assessment will be based on the latest 12-month inflation rates for the previous 12 months.

In other words, if the assessment is made in October 2007, they will take inflation rates for the periods Aug 06-Sep 07; Jul 06-Aug 07; Jun 06-Jul 07 and so on backwards until Sep 05-Oct 06.

The latest 12-month HICP rates for the EU 25 as a whole are for November. They show and EU25 rate of 2.2%–exactly the same as Cyprus’ HICP rate in the same period.

Fiona Mullen