Cyprus inflation in 2006: don’t blame the foreigners

The latest figures on consumer prices by origin show that much of the blame for rising prices lies with local producers rather than those selling into Cyprus.

Prices of locally produced agricultural products rose more than two and a half times faster than overall inflation in 2006. Although overall inflation in 2006 rose by only 2.5%, locally produced agricultural products rose by 6.5%.

Moreover, you can’t blame the increase on oil prices and their impact on fuel costs, because imported agricultural products rose by only 4.4% in the same period. Presumably farmers abroad faced the same rises in fuel prices as everyone else, but didn’t choose to pass on so much of the cost.

The story is the same for industrial prices but even more so. While imported industrial goods prices actually fell by 1.3% in 2006, local prices rose by 2.5%. Then we wonder why the manufacturing sector gets smaller every year.

Even more surprisingly, overall services prices rose by only 2.6%, almost at the same pace of overall inflation. In a maturing economy, such as Cyprus, you would normally expect services prices to rise faster than overall prices.

However, this could be a good sign: while industry is still stuck in the uncompetitive dark ages, perhaps the services sector on which our economy now relies realises the importance of price competition.

 

Fiona Mullen, Sapienta Economics Ltd