Three weeks into the US-Israel war with Iran, the true cost of the conflict is no longer confined to the battlefield. The first economic tremors are already rippling through everyday life, turning a regional war into something felt in fuel stations, supermarket aisles, and business balance sheets.
International markets are reacting in real time, and Cyprus is not immune. Pressures are building across the board, and serious questions are being asked about how far they will spread and how long they will last.
At the centre of it all is energy. Professor of Economics Michalis Michail, speaking to Phileleftheros, explains how rising fuel costs act as a primary catalyst — one that does not stay contained but works its way through the entire economic chain, driving up production costs and, ultimately, the prices consumers pay.
The concern now is that a further escalation could tip the situation into something far more serious: a stagflationary shock that combines slowing growth with rising prices, squeezing incomes, dampening investment, and pushing unemployment higher.
“Everything will depend on how long the conflict lasts,” he says. “Everyone hopes it will end soon so that markets — global and local — can find their footing again. But the consequences will outlast the war itself.”
Three weeks in, are you already seeing the effects on the Cypriot market — and which sectors are being hit hardest?
Fuel prices rose internationally from day one, and Cyprus felt that almost immediately. That is the first-order effect. The second is that higher fuel costs push up energy prices across the board — for homes, for businesses, for everything. No sector escapes that entirely, though some feel it more acutely than others. Higher production costs, both here and abroad, feed through into higher prices. Businesses will pass those costs on sooner or later, and when they do, consumers end up paying more.
A further escalation would raise the risk of a stagflationary shock. Can you explain what that actually means — and what it means for the economy and consumers?
Stagflation is when rising unemployment and rising inflation hit at the same time. War injects uncertainty into the global economy, and uncertainty makes businesses hesitant — they hold off on investment decisions, they pull back. That slows economic activity. An economy that might have been growing at three per cent starts growing at less. Slower growth means less hiring, and less hiring means higher unemployment. Meanwhile, rising fuel prices are pushing inflation up from the other direction.
If the Strait of Hormuz were to close, what happens to fuel prices? And could we see shortages on shop shelves?
A closure would primarily affect oil and liquefied gas flows. Most of what passes through the Strait is destined for Asian markets, but because energy markets are globally connected, the cost impact would be felt everywhere. If the conflict is short, I think we would see a temporary price spike — but not actual shortages of fuel or heating oil. Homes and businesses would not be left without. Fertilisers would also be affected, given the large volumes that transit the Strait. Beyond those two, I would not expect a closure on its own to cause immediate disruption elsewhere.
What if the closure were prolonged?
Then we would be in considerably more difficult territory. Prices are already hovering around $100 a barrel. A sustained disruption could drive them to $140 — potentially above $150. At that level, the knock-on effects would be severe: energy costs, production costs, and consumer prices would all climb sharply, and the pressure on households and businesses would be enormous.
You mentioned fertilisers. What would a Strait closure mean for agriculture and food prices?
Fertiliser prices would rise — that is already happening to some degree — and since agriculture depends on both fuel and fertilisers, production costs in that sector would increase more than most. Those costs would eventually show up in the price of food. That said, there is another variable that matters enormously in agriculture: the weather. A good harvest can go some way towards cushioning the blow from higher input costs. A poor one, on top of everything else, would make an already difficult situation considerably worse.
Would developing countries take a harder hit than wealthier ones?
Without question. In developing countries, food accounts for a very large share of household spending. A 20 per cent rise in food prices — which is not unthinkable in a prolonged disruption — hits those households disproportionately hard.
Supply chain disruption is another major concern — echoes of the pandemic. How serious is that risk?
At this stage, I do not see it as a major threat. That could change if the Houthis in Yemen intensify their involvement and move to cut off Red Sea shipping, or if Iran decides to target vessels in the region directly. Either of those developments would have serious consequences for international trade. If shipping is forced to reroute around Africa rather than through the Suez Canal, freight costs, insurance premiums, and transit times would all rise significantly. Longer routes also mean greater demand for shipping capacity, which drives rates up further. We have seen this dynamic before — it does not take long to feed through into the prices of imported goods.
Is there any way to estimate how much more expensive daily life could become?
Honestly, no — because it all hinges on the duration of the conflict, and nobody can predict that with confidence. Two more weeks of conflict produces very different outcomes from two more years. What I would say is this: even when the fighting stops, the effects will not disappear overnight. If oil supplies from the Persian Gulf are disrupted for a month or two, reserves will have been drawn down and it takes time to rebuild them. Businesses that have been sitting on their hands will not immediately spring back into planning mode. And history tells us that price rises, once embedded, have a habit of sticking — particularly where competition is weak. The war may end; the higher prices often do not.