Cyprus harmonised inflation at 2.6% in March

How to meet the euro target

Inflation as measured by the EU-compatible harmonised consumer price index (HICP) rose to 2.6% year on year on March, compared with 2.3% in February and 2.0% in January.

The figures are based on the recently rebased index, 2005=100.

On a month-on-month basis, the fastest rising category was clothing and footwear: up 9.1%, owing to the end of the sales. Furnishings and household goods were the second fastest risers, at 1.3%.

On a year-on-year basis, high oil costs are still reflected in the 11.5% year-on-year increase in housing, water electricity and gas prices, and the 5.0% increase in transport prices.

Meeting the euro target

For the Cypriot authorities, the fact that the HICP at 2.6% of is markedly lower than the consumer price inflation (CPI) rate of 3.2% recorded in March will be a relief, since it is the HICP which will be used when the times comes to see whether Cyprus has met the inflation criterion for adopting the euro.

This assessment is likely to be made in mid- to late 2007 and will be based on the 12-month HICP rate. This means the authorities will not just take the single August 2007/ July 2006 HICP rate. They will take the “August 2006-July 2007”/”August 2005-July 2006” rate. This 12-month rate must be no more than 1.5% above inflation in the three member states with the lowest inflation rates.

No one knows at this stage what that will be, but a safe assumption is that if HICP in Cyprus goes above 3% for a long period then we are heading for trouble.

Fiona Mullen