Recent geopolitical tensions, mainly due to the Russia-Ukraine war, as well as other pressures in the region, have pushed oil and food prices higher in Cyprus, given the importance of these countries in the international trade of these commodities, according to a study conducted by the Economics Research Center (CypERC) at the University of Cyprus.
The study examined the relationship between changes in raw material prices, which do not originate from the Cypriot economy, and domestic inflation.
The findings show that external shocks have a significant impact on the majority of the Harmonized Index of Consumer Prices (HICP) sub-categories, CypERC continues. A 1% increase in oil prices increases energy inflation by 3.5%, while a similar increase in food prices mainly affects unprocessed food inflation (1%).
Oil, which is used to produce the vast majority of energy in Cyprus, is the main driver of the index-heavy energy inflation in the HICP, resulting in a likely higher impact than in other countries. However, this impact may diminish in the future given the transition to more environmentally friendly energy sources, CypERC concludes.