Cyprus is back in deflation, which means that prices are falling relative to the same months in the previous year. Why is this happening? Is it happening across the board and is it going to last? I explain in just over 10 minutes.
I wanted to give the transcript only to paying subscribers but it wasn’t possible to do that without cutting everyone off from the video, so keep scrolling if you want the transcript. Meanwhile, if anyone wants to wean me off Excel and teach me how to use R (the data visualization software), do get in touch. I produce 85-90 Excel tables and charts and tables per quarter. I feel like R will save me a lot of unnecessary repetitive tasks and I know I do not have the patience to learn it via static pre-recorded material, so need some one-to-one coaching, even if it is online.
If you want my premium monthly in-depth product, check out Sapienta Country Analysis Cyprus and other deep-dive reports here. And if you can’t afford that but want the executive summary only for just €100/year, you can find that here on Substack, at Cyprus Pocket Brief.
Or keep these articles and hugely labour-intensive videos coming by supporting this publication, Sapienta Cyprus Snippets, for just €49 per year.
TRANSCRIPT
Cyprus is back in deflation, which means that prices are falling relative to the same months in the previous year. Why is this happening? Is it happening across the board and is it going to last?
My name is Fiona Mullen, and I'm the director of Sapienta Economics. Each month, for blue-chip clients, I take a deep dive into the economy, the banking sector, energy developments, Cyprus problem, regional developments, you name it, I do it.
Now, the reason why inflation - deflation - is interesting this time is because it's pretty rare in Cyprus.
The last time we had deflation of any significant period was in the financial crisis, the Cyprus financial crisis, that lasted from 2013. The bailout programme finished in 2015. And we had, combined with global trends, we had negative prices. So prices were falling. And then the next time we had it was in 2020 where we also had a recession because of COVID.
But this year we're bombing along at 3.0 to 3.5% real GDP growth expected this year. There's no stopping the Cyprus consumer it seems. So why have we got deflation now when we're not in recessionary conditions?
And just to show you a bit more of a close-up from that first slide, we have two inflation indices in Cyprus. One is the EU-harmonized consumer price index. That's the blue one. That hasn't actually reached deflation yet. And then we have basically the national consumer price inflation rate, which has been showing deflation since about M ay. The difference between the two is the national one is done on the basis of the Family Budget Survey, but that's only updated every five years, so it can be outdated.
The EU harmonized one is potentially, you could argue a one size fits all, but it is done every year, and it's based on GDP, which is all of the things that go to make up the size of the economy in Cyprus.
Now, when you are looking at monthly figures or even quarterly figures, one thing you should always have a double check of, if these figures have changed sharply, is what was going on in the same period of the previous year. Because you might have what's basically a high baseline. If you shot up by 10% last year, you're not going to shoot up again by 10% this year.
And so there was a bit of this potentially going on in May. We had quite high inflation in May 2024 - 3% - and 3% in June. And 2.4% in July. So it's not that surprising that a year later you weren't seeing prices rise quite so high. But that doesn't really explain what was happening in July and August.
This is the EU harmonized one but as I said, you've got a similar kind of trend and even deflation with the national consumer price inflation rate.
Now, one way of looking at what's causing the deflation is looking at the economic origin. This is only given under the National Consumer Price Index. It's not given under the harmonized one, and you can see very clearly that the big driver of negative inflation rates is petroleum products, okay?
And the reason for that is basically international. This is the benchmark European Brent crude oil price. There's a US one called the West Texas Intermediate, but the trends are the same. What you can see is we had a big leap in around 2022, but prices have basically been trending down ever since.
Now, oil is important because it affects the price of inputs into refineries, which produce the petrol that we use in our cars that produce the diesel that the Electricity Authority of Cyprus uses. Still 75% of consumption last year came from fossil fuels in Cyprus. There's a difference between what's installed capacity and what we're actually consuming, for reasons that I've explained in other articles on Substack. But the bottom line is that oil prices have a really big impact on inflation, okay?
And you can see that every single month of this year, the benchmark oil price has been lower than in the same period of 2024.
So that would've affected all kinds of prices in Cyprus. Another thing you can see here is price of imported goods has clearly been negative since pretty much the beginning of the year.
And why is that? Two reasons. Food is a pretty large chunk of imports of goods for Cyprus, and you can see from the World Bank Food Index that prices have been falling. Again, this will be related to oil prices. It's all connected. You spend less money buying fuel to get the wheat out of the ground, to get it to the port. And the ship spends less money on the fuel to send it abroad. The bakeries spend less for their flour and you get a global drop in food prices.
Another reason is raw materials prices. Manufacturing inputs in Cyprus account for 17% of all inputs and raw materials prices have a big impact on those. So we are talking things like, I think it means things like steel and concrete and that sort of thing, right?
And again, my theory here is that that had a big knock on impact on the local goods. So this is mainly manufactured goods. Our two biggest manufacturing items are pharmaceuticals and halloumi. So if you are spending less on energy, you're spending less on inputs, you're going to be able to pass that price on to your customers.
What didn't change and why it's difficult for any of us to feel like prices are falling, is services. So your haircuts are getting more expensive, your restaurants are getting more expensive, your private doctors have started to get more expensive, etc. Education as we'll see in a minute, has got more expensive.
So how does that translate into the indices by category? So this is the National Consumer Price Index. The big one that gets affected, and this is a heavily weighted category, is the one called housing, water, electricity, and gas. This is, it's mostly your electricity prices, right? Transport is also the cost of your fuel, of your petrol, and you can see that this has been pretty negative.
But so have a lot of other categories. The one I can't explain actually is clothing and footwear. I really don't know why that's so negative. Is that competition? I'm not sure. You can see food and alcoholic beverages has gone down. Some of this could potentially be that "e-kalathi" scheme that the government has introduced that has brought more transparency on grocery prices across Cyprus. Personally, I haven't worked out how you use it, but it might have encouraged shops to cut prices anyway because they know people will start to pay attention.
We also had a cut in VAT on electricity from 19% to 9% from 1 April. And again, you can see that in the housing, water, electricity, and gas prices. What we also had in June, 2024 was fuel subsidies phased out. Theoretically that means that we should see higher prices from then on, but it doesn't look like it. And I, I wonder whether it was just offset by the bigger impact of international fuel prices.
I've put the EU harmonized here as well. As I say, they're a little bit different, but generally the trends are kind of the same.
So the big question is, are we going to still be in deflation or will the EU harmonized rates also reach deflation for the next few months?
I think clearly the pressure from outside is actually going to be quite soft. This is Reuters just a few days ago. HSBC expects a big oil surplus. What does that mean? Oil surplus means there's a lot of something, people don't have to fight to get it, and so prices fall, okay?
Also, oil prices are expected to fall. This is even more recent.- I'm recording this on 18 September - because the US economy is expected to start slowing. We might still have at least weak external pressure on prices, but it won't be for a particularly good reason.
On the other hand, domestic pressures in Cyprus are definitely upwards, and I would say pretty painful. This is Cyprus labour costs, right? They've been growing 4% to 5%; they were even more than that in 2023; and if your inflation rate is zero b ut your costs are going up 4.3%, at some stage, you're going to pass that on to consumers, right? Especially when you've got a strong growth rate. We've got low unemployment, the consumption is pretty strong. Companies and Cyprus are going to think, I'm going to pass this on to consumers.
And you can see that the services companies have already been doing this. Let's see if we get it from the locally produced goods and from the petroleum products as well.
And another reason is that even though these prices are getting quite painful in my opinion, we've got inflationary pressures coming from the unions, who want to expand the cost of living adjustment. They want to increase it and they want to expand it to everybody.
And I've written about that elsewhere. I think if you don't link it to productivity, you're going to get into trouble: Cyprus is going to find itself priced out of all kinds of markets.
So to summarize, what are the reasons for deflation? A bit of it comes from the high baseline last year. A lot of it comes from low international oil prices, which is also affecting food and manufacturing prices imported to Cyprus Cyrus, some of it comes from the cuts in VAT on electricity.
Some of it might be coming from this e-kalathi grocery price app.
Will it last? To be honest, it's a bit difficult to tell because international pressures are down, but domestic pressures are up. My best hunch is it's not going to last. We're not going to continue to have negative inflation rates, but we're not going to see a massive jump either.
That's it from me. As I said at the beginning, I do a monthly in depth deep dive into fiscal banking, macro economy, political regional Cyprus problem, energy reforms, economy of normal Cyprus. You can find out more about that at my website, or if you just want a mini version of it, you can go to CyprusPocketBrief.substack.com and you'll just get the executive summary for considerably less money.
Thank you for listening.
