Inflation in Cyprus has moved from being an isolated phenomenon to becoming an established trend, economist Tassos Yiasemides told CNA, expressing concern both about the momentum inflation showed in 2026 as well as the risk that energy costs will feed into core inflation in the coming months.
At the same time, he refers to a “peculiar asymmetry” in Cyprus regarding interest rate hikes by the European Central Bank.
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“Because inflation is higher than the European average, the real interest rate in the Cypriot economy is lower than in the core of the eurozone” and “therefore, the single monetary policy is less restrictive here than it needs to be.”
According to data from the Statistical Service, inflation in August 2026 ran at a rate of 3.5%, compared to August of last year, following a 2.9% increase recorded in July and 3.06% in June. The largest increases, compared with August 2025, were recorded in petroleum product prices (20.3%) and electricity and water prices (6.0%).
Furthermore, harmonized inflation rose sharply by 5.2% year-over-year in August, following increases of 4.4% in July and 4.1% in June, with energy prices rising by 15%.
According to Mr. Yiasemidis, the most important lesson is structural. “An economy with high growth rates but almost complete dependence on imported energy will experience inflation with every external crisis, regardless of the stance taken by Frankfurt or the Ministry of Finance,” he emphasized.
He noted that the most effective anti-inflationary policy for Cyprus is to reduce energy dependence.
This means, as he explained, renewable sources, storage, electrical interconnection, and improved energy efficiency. “As long as these measures are postponed, every surge in prices will be addressed with temporary measures that treat the symptom rather than the cause,” he added.
Commenting on the 5.2% year-over-year increase in the Harmonized Index of Consumer Prices in August, Mr. Yiasemidis said it was the second-highest in the eurozone and noted that he was more concerned about the upward trend shown by the index than by the level itself.
He added that the index has been on a steady upward trajectory since the beginning of the year, with no signs of stabilization.
“Such a trend cannot be explained solely by base effects or seasonality. It indicates that price increases have begun to spread throughout the broader price system,” he emphasized.
Commenting on the discrepancy between the harmonized and national indices, Mr. Yiasemidis said that the latter is significantly lower and added that “the difference is mainly methodological.”
The harmonized index also includes the consumption of non-permanent residents, so it places greater weight on tourism, hospitality, and transportation, he noted, adding that “these are the sectors with the highest energy intensity and the fastest price adjustments.”
He also noted that, for policy-making purposes, the conclusion is twofold, explaining that part of the pressure stems from external demand rather than household disposable income.
At the same time, he noted that the competitiveness of the tourism sector—a key pillar of the economy—is eroding relative to competing destinations.
Noting that energy is undoubtedly the driving force, Mr. Yiasemidis said that in the national index, petroleum products recorded the largest annual increase among all economic categories, while in the eurozone as well, energy was also the component with the fastest growth rate.
“The rise is not due to fundamental supply and demand factors but to a geopolitical risk premium linked to the U.S.-Iran conflict – Iran conflict and the security of the Strait of Hormuz,” he added.
Risk for the coming months
Furthermore, Mr. Yiasemidis told CNA that for Cyprus, the pass-through rate from international energy prices to domestic prices is “structurally high,” and he added that the economy depends almost exclusively on imported fuels, electricity generation still relies on petroleum products, and the island’s geographical isolation adds transportation costs to nearly every imported good.
“The deterioration of terms of trade essentially acts as a tax on national income, paid abroad,” he noted.
Referring to the risk for the coming months, Mr. Yiasemidis said that it concerns secondary effects, not the primary disruption.
“Once energy costs feed through to core inflation—that is, to services, processed foods, and ultimately wages— the deceleration becomes much slower and more costly,” he emphasized.
In the case of Cyprus, he continued, the existence of a wage indexation mechanism reinforces the dynamics of this spillover. “This makes inflation expectations the most critical variable of the period,” he added.
ECB Rate Hikes and Inflation
Referring to the ECB and its second interest rate hike this year—which raised the deposit rate to 2.50%—Mr. Yiasemidis said that “monetary policy, however, is a blunt instrument when it comes to supply disruptions” and “it cannot influence the price of oil,” but “it can only curb demand and temper expectations.”
Noting that Cyprus faces a peculiar asymmetry, Mr. Yiasemidis said that because inflation is higher than the European average, the real interest rate in the Cypriot economy is lower than in the core of the eurozone.
“So the single monetary policy is less restrictive here than it needs to be,” and “at the same time, the high proportion of variable-rate loans quickly passes on the cost of tightening to households and businesses,” he emphasized.
“In other words, Cyprus is suffering the side effects of monetary tightening without fully benefiting from its anti-inflationary effect,” he concluded.
Source: CNA
