Inflation in Cyprus appears to be shifting from an isolated phenomenon into an entrenched trend, economist Tasos Yiasemides told the Cyprus News Agency, expressing concern about the momentum of inflation in 2026 and the possibility that energy costs will feed into core inflation in the coming months. Commenting on the 5.2% annual rise in the harmonised index of consumer prices in August, the second highest in the eurozone, Yiasemides said he was more worried about the index’s momentum than its level. The index, he said, has been rising steadily since the start of the year with no sign of stabilising. “Such a trajectory cannot be explained by base effects or seasonality alone,” he said. “It shows that price increases have begun to spread to the wider price system.”
Figures from the Statistical Service show that national inflation stood at 3.5% year on year in August 2026, up from 2.9% in July and 3.06% in June. The largest increases compared with August 2025 were recorded in petroleum products, up 20.3%, and electricity and water, up 6%. Harmonised inflation rose to 5.2% in August, from 4.4% in July and 4.1% in June, while energy prices increased by 15%. Yiasemides said the gap between the two indices is “mainly methodological”. The harmonised index also includes spending by non-residents, giving greater weight to tourism, hospitality and transport, which he described as the sectors with the highest energy intensity and the fastest price adjustment. For policymakers, he said, the conclusion is twofold: part of the pressure stems from external demand rather than household disposable income, while at the same time the competitiveness of Cyprus’s tourism product, a key pillar of the economy, is being eroded against rival destinations.
Energy as the driving force
Yiasemides said the driving force is unquestionably energy. In the national index, petroleum products recorded the largest annual rise of any economic category, while energy was also the fastest-growing component across the eurozone. “The rise is not due to supply and demand fundamentals but to a geopolitical risk premium linked to the US-Iran conflict and the security of the Strait of Hormuz,” he said. He described the pass-through from international energy prices to domestic prices in Cyprus as “structurally high”, since the economy depends almost entirely on imported fuel, electricity generation still relies on petroleum products and the island’s insularity adds transport costs to almost every imported good. “The deterioration in the terms of trade effectively works as a tax on national income, paid abroad,” he said.
The main lesson, in his view, is structural. “An economy with high growth rates but almost complete dependence on imported energy will import the inflation of every external crisis, whatever the stance of Frankfurt or the Finance Ministry,” he said. The most effective anti-inflation policy for Cyprus, he argued, is reducing its energy dependence, which requires renewable energy, storage, an electricity interconnector and improved energy efficiency. “As long as these are postponed, every wave of price rises will be met with temporary measures that treat the symptom and not the cause,” he said.
The risk of second-round effects
Looking ahead, Yiasemides said the risks in the coming months concern second-round effects rather than the initial shock. “When energy costs pass into core inflation, meaning services, processed food and eventually wages, bringing inflation down becomes much slower and more costly,” he said. In Cyprus, he added, the automatic wage indexation mechanism reinforces this spread. “This makes inflation expectations the most critical variable of the period,” he said.
Commenting on the European Central Bank’s second interest rate hike this year, which has taken the deposit facility rate to 2.50%, Yiasemides described monetary policy as “a blunt instrument against a supply shock”, since it cannot influence the price of oil and can only restrain demand and expectations. He said Cyprus faces a “peculiar asymmetry”: because its inflation is higher than the European average, its real interest rate is lower than in the core of the eurozone. “So the single monetary policy is less restrictive here than it needs to be,” he said. “At the same time, the high proportion of variable-rate loans passes the cost of tightening quickly on to households and businesses.” He concluded: “In other words, Cyprus suffers the side effects of tightening without fully enjoying its anti-inflationary effect.”
Source: CNA
