Inflation and Current Account Deficit

The inflation rate for October was announced this morning. The Consumer Price Index (CPI) was reported at 2.88%, which is higher than expected.

However, the median expectation of 19 institutions participating in a news channel's inflation survey regarding October was a monthly rate of 2.5%. Accordingly, the annual inflation for October was expected to be around 48%. The reported rate was 48.58%. Meanwhile, the lowest monthly expectation for October's inflation was stated to be 2.1%, while the highest was 3%. As I mentioned in previous reports, the average of the predictions is not a realistic approach. Still, we did not expect it to be lower than 2.5%. And indeed, it wasn't.

This can be confirmed from what I said: the highest inflation estimate for October was 48.8%, while the lowest estimate was at the level of 42.5%. It appears that those who predicted higher were correct.

The year-end inflation estimate for 2024 from the participating institutions has increased by 2 points to 44% compared to the previous survey period. Thus, the upper band of the Central Bank of Turkey's (CBRT) year-end forecast range of 34-42% has been surpassed. The CPI of 48.58% for October already indicates that things are not going well.

Moreover, even the lowest estimate for the end of 2024 being at the 42% level shows that neither the Medium Term Program (MTP) nor the Central Bank's forecasts are likely to be accurate. Those who produced erroneous forecasts for 2024 in the MTP announced just before the year ends can hardly expect to be correct for 2025. There is no room for disappointment or resentment here.

Meanwhile, the statement from Ankara that "inflation will be below 20% by the end of 2025" implies that it will be higher than 17.5%. From this, we understand that the official inflation for 2025 will be at least around 25%. This is because the targets for 2024 started at 36%, then 38%, and finally 42%.

The nearly 70% 12-month inflation expectation among citizens in the Central Bank's expectation surveys shows a lack of confidence in economic management. Generally, it can be said that citizens believe the public's predictions are usually more accurate, hence concerns about 2025 are increasing. Frankly, statements from the economic management do not reassure people. I was particularly struck by this sentence: "We will make the sustainable current account deficit permanent."

Such a statement amounts to a premature acceptance of defeat. According to this, the possibility of achieving a current account surplus by increasing the added value of exports and focusing on foreign currency-earning activities has been completely deemed "impossible." I have repeatedly warned that the economic management should not make statements without thorough consideration. I insisted that "the communication leg is lacking." Unfortunately, I was proven right.

The initial excitement created by the appointed individuals has given way to concern after 1.5 years. Those who showed tolerance toward the previous economic management for 2 years will undoubtedly do the same for the current management. However, the waiting period does not seem likely to end with a happy outcome.

Prof. Alkin