About Inflation and Exchange Rates

Now, I’m going to attempt to comment on two issues above by establishing a connection among the latest developments even though they seem rather uncorrelated with each other.

First of all, I wasn’t surprised by inflation rates because I was expecting that people would further feel the weight of discounts offered because of tax cuts and lack of demand. As a matter of fact, only the price of a total of 407 goods and services items has declined. However, these goods and services make their presence felt in CPI index. So, a decline was unavoidable indeed.

PPI, on the other hand, was hit by a bigger decline. However, a year-over-year increase around 34% poses a major problem for those who have entered into (PPI+CPI) / 2 rental or service agreements, which may yield a result that can prevent further fall in CPI in the upcoming period. Outturn inflation and new prices, on the other hand, would prevent inflation from falling over the next period. People now seem like they prefer to take outturn inflation rates into consideration rather than targeted inflation because of CBRT’s failed projections which almost never match the targeted inflation rates. Remember, economic management is the ability to mostly manage people’s expectations.

“What does fighting inflation mean?”

I feel like I must remind you of the late Professor Erdoğan Alkin’s most valuable assessment: “Fighting inflation involves reducing the production costs and providing consumers with affordable goods and services.” From this point of view, it’s not possible to decrease CPI permanently without taking substantial actions to reduce production costs. Core inflation resistance also indicates the same.

As for exchange rates, Sales wave that first started in emerging markets because of large concerns for Global Growth has largely penetrated in developed markets as well. I think rapid appreciation in the yen’s value since the start of 2018 is also worthy of notice. The sales wave I mentioned above also indicates the end of “carry trade” trend started by investors who borrow money at a low interest rate in order to invest in assets that are likely to provide higher return. Global rise in exchange rates, negative expectations for the future of global as well as US economy are among the factors drive investors into further desperation.

However, Turkey stands out negatively among its counterparts since stock market sales and deprecation of national currency seem harsher than anywhere else. Additionally, “Turks leave their countries” headlines that appear in foreign press are causing a decline in investors’ favour for Turkey, and the fact that top fund holders are applying for citizenship of another country further contribute into this negative propaganda.