Tax increases push Cyprus inflation up in January

The annual inflation rate jumped to 2.84% in January from 1.64% in December according to the latest figures from the Statistical Service, largely owing to an increases in taxes.
From January 2011 the EU minimum VAT rate of 5% was applied to food and medicines and from late 2010 additional duties were also slapped on cigarettes as the government sought ways of cutting its budget deficit, now estimated at around 5.3% of GDP in 2010.
As a result of the taxes, prices of alcoholic beverages and tobacco in January 2011 were 4.99% higher than in the previous month and 10.78% higher than in January 2010.
Prices of health products rose by 1.3% compared with the previous month. This is not as high as the VAT rate but this suggests that most health products are not medicines as such so were already subject to the full 15% rate.
On the other hand, the 5% VAT was almost fully reflected in the prices of food and non-alcoholic beverages, which rose by 4.83%, from a drop of 2.09% in the previous month.
Compared with the same period of the previous year, food and soft drinks prices were 2.18% higher.
At the same time, rising international oil prices ensured that prices of housing, water, electricity and gas were 2.72% higher than in the previous month and 7.82% higher than in January 2010.
Despite these developments, the monthly consumer price index recorded a seasonal fall owing to the winter sales.
The index dropped by 0.82% compared with the previous month, mainly owing to decreases in the prices of clothing, footwear and household furnishing.

Fiona Mullen
www.sapientaeconomics.com