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12° Nicosia,
28 June, 2022
 
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Op-ed: Inflation welcomes 'Generation Z'

'With inflation likely to continue for a few more years and interest rates gradually rising, low-income groups will be hit hard.'

by Pavlos Loizos, CEO of WiRE FS

Inflation is the rate at which prices rise, which means that we need more money to buy the same product or service. Consequently, if your salary stays the same, then your purchasing power will decrease, as you will be able to buy fewer goods and services. High inflation tends to have a disproportionate impact on low-income consumers, as they have the lowest disposable income to cope with price increases. Thus, with persistent inflation, the level of inequality increases significantly.

The question is whether Cyprus is ready to accept such a population increase at the moment. Are the country's infrastructures...ready to accommodate such a large and varied group of residents?

Inflation also affects interest rate levels. The higher the inflation, the more likely it is that interest rates will rise. This is because lenders will demand higher interest rates as compensation to reduce the purchasing power of the money paid to them in the future. The US Federal Reserve has already raised interest rates in recent months, while the European Central Bank (ECB) has indicated it intends to follow suit soon. The ECB has expanded its bond markets due to the pandemic, which has reduced borrowing costs. As monetary policy normalizes, first by reducing the bond market and then by raising interest rates, borrowing costs will increase.

With inflation likely to continue for a few more years and interest rates gradually rising, low-income groups will be hit hard. This will be done by ending the various state subsidies granted in the midst of the pandemic, raising the pressure on most households.

The expected stagflation (ie inflation that is not accompanied by corresponding economic growth and which was last recorded in the 70's) will burden society, as millennials and Generation Z have never experienced anything similar. They have spent most of their lives in an environment of low inflation and low-interest rates which is the exception rather than the rule. As the saying goes "those who do not learn history, are doomed to repeat it". I would personally add that "and those who have learned history, are doomed to see others repeat it".

These changes come at a very interesting time for Cyprus. Since the beginning of the year, more than 14,000 Ukrainians have already arrived on our island, followed by thousands of Belarusians and Russians. Real estate rents have started to rise significantly, while office space is becoming increasingly scarce. To all these arrivals are added those from neighboring Lebanon, which have skyrocketed in the last three years. The question is whether Cyprus is ready to accept such a population increase at the moment. Are the country's infrastructures, ie schools, hospitals, etc., ready to accommodate such a large and varied group of residents? What about the changing geopolitical environment with the confrontation between the EU and Russia and the rapprochement between Israel and its neighbors?

So let's be a little naive, like when someone falls in love for the first time, and let's assume that Cyprus, yes, is ready to cope with these changes. What about the workforce? Ready? And what about public finances and the readiness of banks, since wages are linked to inflation due to ATA? Let's go crazy in Seychelles, as the song says!

With more affluent people moving to Cyprus, the momentum for change - already underway - will accelerate. It is important to discover this new environment by embracing change, rather than trying to fight it. Unfortunately, those who need to be more convinced and accept the changes are those who are currently in the worst position due to the pressure on their purchasing power, before they are able to reap any rewards from being able to have a better lifestyle or more chances. And the time now could not be worse, since we are entering a pre-election year. Only time will tell if we will go to the Seychelles or if we will be left with burnt lips.

[This op-ed was translated from its Greek original]

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Cyprus  |  inflation  |  economy

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