Harmonised inflation falls, ‘Maastricht’ rate stabilises

Good news for euro adoption plans

Harmonised consumer price inflation fell to 2.2% year on year in September, compared with 2.7% in August, thanks largely to year-on-year falls in the prices of clothing and footwear and communications, as well as much lower inflation rates in the oil-related categories of transport and housing, water electricity and gas.

This is good news for euro adoption plans. The key inflation rate that will be used to judge whether Cyprus has met the euro Maastricht inflation target (the average 12-month harmonised (HICP) inflation rate) stabilised in September.

It was 2.3% in the 12-month period October 2005 to September 2006, compared with 2.3% in the period September 2006 to August 2006, according to the Statistical Service Cystat. Before that, it had been steadily rising since May.

In order to meet the Maastricht inflation target next year, average 12-month HICP in Cyprus must be no more than 1.5% above the average 12-month HICP in the three EU countries with the lowest inflation rates.

In August–the last month for which data are available–Eurostat reported that the lowest three were Finland at 1.2%, Poland at 1.3% and Sweden at 1.4%. This translates into an average 12-month rate, or a “Maastricht target rate”, of 1.3% for the three countries with the lowest inflation rates.

That means that if Cyprus’ assessment had been made in August 2006, then its 12-month harmonised inflation target would have been 1.3% + 1.5% = 2.8%.

With Cyprus’ 12-month inflation at 2.3% in September, that means it still only has 0.5% of “wiggle room” but at least the rate is no longer climbing. Fiona Mullen