Causes and Implications of Elevated Inflation in Cyprus
Selected Issues Papers, July 7, 2023
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- Causes and Implications of Elevated Inflation in Cyprus
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Bibliographic details
- Authors: Robert C. M. Beyer
- Published: July 7, 2023
- Series: Selected Issues Papers
- DOI: https://doi.org/10.5089/9798400247453.018
Key findings
- Inflation has risen sharply in Cyprus, initially driven by imported prices, but increasingly broadening to domestic prices.
- A Phillips Curve estimate attributes the high inflation largely to energy prices, external price pressures, and inflation expectations at the end of 2022.
- Historically high pass-through of inflation shocks to wages—amplified by a tight labor market—may make inflation persistent.
Analysis and drivers
- Imported prices were the initial trigger of the sharp rise in inflation.
- Energy prices are a principal driver, alongside broader external price pressures.
- Inflation expectations at the end of 2022 contribute materially to observed inflation dynamics.
- Wage dynamics exhibit historically high pass-through from inflation shocks, increasing the risk of persistence in inflation.
Risks and outlook
- Tight labor market conditions amplify wage pass-through, heightening the risk that elevated inflation will persist.
- Broadening from imported to domestic price pressures suggests second-round effects that could sustain inflation absent policy response.
Policy implications and recommendations
- Implement policies to stem inflationary pressures while protecting vulnerable households.
- Address energy-price-related channels and external price pressures to mitigate ongoing inflation drivers.
- Monitor and, where appropriate, respond to inflation expectations and labor market tightness to prevent entrenched inflation-wage spirals.
Source: Causes and Implications of Elevated Inflation in Cyprus — IMF
Content in this bundle
- Causes and Implications of Elevated Inflation in Cyprus — Section 1