UCY CypERC study identifies correlation between oil price increases and inflation

07:47 - 24 July 2025

Economy Reporter

A study conducted by the Economics Research Centre (CypERC) at the University of Cyprus has examined the relationship between changes in raw material prices, which do not originate from the Cypriot economy, and domestic inflation.

According to the study's findings, published in the Centre's latest newsletter, recent geopolitical tensions, mainly due to the Russia-Ukraine war, but also other tensions in the region, have pushed oil and food prices higher, given the importance of these countries in the international trade of these commodities.

As stated, the study looks at how changes in food and oil prices affect inflation. To examine the transmission of these shocks, data on inflation based on the Harmonized Index of Consumer Prices (HICP) in Cyprus, as well as its main subcategories, between January 2008 and December 2021 was used to determine whether a model could predict inflation based on changes in oil and food prices.

The findings of the study show that external shocks have a significant impact on the majority of HICP sub-categories, the Centre continues.

In particular, it is noted that a 1% increase in oil prices increases energy inflation by 3.5%, while a similar increase in food prices mainly affects unprocessed food inflation (1%).

Based on the above, the model's forecast, using the actual size of the shock for the first half of 2022, is similar to the actual development of energy inflation over the same period, which is explained by the fact that oil, which is used to produce the vast majority of energy in Cyprus, is the main driver of energy inflation in the HICP, resulting in a likely higher impact than in other countries.

However, this impact is likely to diminish in the future, given the transition to more environmentally friendly energy sources, the CypERC concludes.

(Source: CNA)

UCY CypERC study identifies correlation between oil price increases and inflation

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