Nicosia:The Cyprus Fiscal Council (CFC) has advised that fiscal policy should focus on temporary and targeted measures rather than across-the-board tax interventions to combat inflation. This recommendation was part of a presentation on inflation in Cyprus, emphasizing the need to provide protection to vulnerable groups without permanently containing prices.

According to Cyprus News Agency, The presentation, titled 'Inflation in Cyprus 2025-2026 From the Energy Shock to a Fiscally Prudent Response', analyzed inflation trends, noting a significant shift from the lowest to the third-highest inflation rate in the EU between 2025 and August 2026. The CFC attributed this change primarily to an external energy shock, highlighting Cyprus's high dependence on energy imports, which increases its vulnerability to international market disruptions.

Energy costs were identified as the main driver of inflation, impacting both fuel and electricity prices. The CFC pointed out that while petrol remains relatively cheap in Cyprus, electricity costs for businesses are among the highest in the EU, posing competitiveness issues. The council stressed the structural nature of the problem, with Cyprus importing 88% of its energy needs.

The CFC warned against the high costs of across-the-board tax cuts, which can conceal inflation temporarily but become permanent and costly over time. It recommended focusing on domestic energy development, storage, grid improvements, and energy-efficient upgrades to reduce reliance on imported energy. The council emphasized that fiscal measures should be temporary, reversible, and based on deviations from a 'normal' inflation reference price.

The presentation concluded that permanently containing prices could hinder economic adjustment and increase fiscal costs. Instead, the CFC called for a gradual withdrawal of support, with investments directed towards energy infrastructure improvements and targeted aid for vulnerable groups.