The Central Bank of Cyprus (CBC) has released a comprehensive report indicating that businesses are passing on costs to consumers, thereby driving up inflation. This comes at a time when companies' profit margins have also notably increased.

Key Findings:

• A significant rise in overall inflation in Cyprus, particularly from April 2022.

• In August 2022, service sector inflation peaked at 8.1% before falling to 3.4% in April 2023.

• After the pandemic, Cyprus' inflation trends have mirrored those of other countries like Greece and Portugal.

According to Brief, The CBC's latest financial bulletin reveals that the inflation of services surged in Cyprus over the last two years. It highlights that the rise was particularly noticeable from April 2022 onwards. The bulletin states that service sector inflation reached an alarming peak of 8.1% in August 2022, before moderating to 3.4% in April 2023, in line with the overall inflation trend.

According to the CBC’s technocrats, the service inflation in Cyprus has followed a similar trajectory to countries like Greece and Portugal, especially after the pandemic. They note that Cyprus has seen greater percentage fluctuations compared to other European countries like Germany, Italy, and Spain. As inflation increased, it appears that the profit margins of companies have widened both within Cyprus and in the Eurozone.

The report also pinpoints that external elements like a lack of cheap alternatives from markets such as China due to increased shipping costs, and rising energy prices have played a role in driving up prices. Despite these challenges, the overall demand in the economy seems to have remained largely unaffected, thanks to consumers' accumulated savings during the pandemic period. This allowed for an easier transition of increased costs onto consumers.

Based on various models and estimates, approximately 25% of the service sector inflation during 2021-2022 can be attributed to companies’ increased profit margins. This has had an impact of around 0.35% in 2021 and 1.3% in 2022 on service sector inflation, with an estimated effect on the overall inflation of 0.15% in 2021 and 0.50% in 2022.

The CBC forecasts that expected reductions in inflation from 2023 onwards, along with wage increases due to the Cost of Living Adjustment (COLA), will likely lead to a slight decline in companies' profit margins.