Nicosia: A study conducted by the Economics Research Centre (CypERC) at the University of Cyprus examines the relationship between changes in raw material prices, which do not originate from the Cypriot economy, and domestic inflation.
According to Cyprus News Agency, the study’s findings, published in the Center’s latest newsletter, indicate that recent geopolitical tensions, primarily due to the Russia-Ukraine war and other regional conflicts, have driven oil and food prices upward. This is significant given the role of these countries in the international trade of these commodities.
The study explores how changes in food and oil prices impact inflation. To understand the transmission of these shocks, data on inflation based on the Harmonized Index of Consumer Prices (HICP) in Cyprus, along with its main subcategories from January 2008 to December 2021, was analyzed to ascertain whether a model could predict inflation based on fluctuations in oil and food prices.
The study’s findings reveal that external shocks significantly influence most HICP sub-categories. Specifically, a 1% increase in oil prices results in a 3.5% rise in energy inflation, while a similar increase in food prices primarily affects unprocessed food inflation by 1%.
The model’s forecast, using the actual size of the shock for the first half of 2022, aligns with the actual development of energy inflation during the same period. This correlation is attributed to oil’s role as the primary driver of energy inflation in the HICP, as it is used extensively to produce energy in Cyprus, suggesting a potentially higher impact than in other countries.
However, the CypERC concludes that this impact may diminish in the future with the transition to more environmentally friendly energy sources.