Cyprus harmonised inflation–analysis

Upward pressure on wage bill

The EU-harmonised inflation rate in Cyprus continued to climb in June, hitting 4.5% compared with 4.1% in May and 3.5% in April.
The average for the first six months is 3.6% but looks like it is climbing towards 4% for the whole year.
High inflation adds to the public and private-sector wage bill, owing to the widespread practice of wage indexation.
The highest increase was recorded in clothing and footwear, prices of which were 11.3% higher than in June 2010. The average for the first six months was just 4.9%.
The June upturn might just point to a modest recovery in a sector that, by the first quarter of 2011, had seen four consecutive quarters of decline in sales volumes.
The second highest increased was in alcoholic beverages and tobacco prices, which rose over the year earlier by 10%, thanks to recent increases in tobacco duties.
For the first six months as a whole, prices of alcohol and tobacco are up 8.3% over the same period of the previous year.
Tax changes have also affected food and non-alcoholic beverages prices, which rose 8.5% year on year in June and 3.5% for the first six months. VAT at the reduced rate of 5% started to be applied to food and medicines from January 2011.
Another area caught by regulation as well as rising international prices is housing, water, electricity and gas. Prices in this category were 7% higher than the year earlier in June and 7.6% higher for the whole of the first half.
Fiona Mullen
Director, Sapienta Economics Ltd