Cyprus inflation sparks euro worries

Inflation rises above 3% again in May

The consumer price inflation rate for Cyprus flipped back over 3% again in May, recording 3.13% compared with May 2005, having recorded 2.96% in April.

This is not the inflation rate that the European authorities will use when it comes to assess Cyprus’ inflation performance (they look at the harmonised rate–HICP). Nevertheless, the rising rate of inflation has raised questions about whether Cyprus will meet the Maastricht inflation criterion by early next year, especially since Lithuania was prevented in May from adopting the euro in 2007 because it missed the inflation target while meeting all of the others.

A moving target

The main difficulty is that the Maastricht inflation criterion is a moving target.

The EU authorities (Commission European Central Bank, eurozone members etc) take the lowest 12-month inflation rates (eg August to July 2006 over August to July 2005) of the three member states which have the lowest inflation rates.

And they take all EU members, not just eurozone members.

Cyprus’ 12-month harmonised inflation rate reached 2.0% in April, compared with the Maastricht target that month of 2.6%.

HICP data for Cyprus are not yet out for May, but one can assume that if the CPI is rising, the HICP will rise too.

The main reason for the increase in May was transport, affected by oil prices, which was up 1.1% compared with the previous month.

Fiona Mullen