Inflation rates on precision scale

Inflation rates were released yesterday morning and as you may expect CPI remain at single-digit with 8.55 percent despite a high percentage of 2% per month due to the negative basis effect in the last two months of the previous year.

We faced -1.44% in November and -0.40 % CPI December last year. However, all figures have turned out to be positive as of December this year. We haven’t even seen a monthly negative inflation that we had to face from time to time, especially in June, July or August sometimes in the last 15 years. So, with a simple calculation, I think I can tell you what we need to achieve 8.5% target for 2020 set out in the NEP.

Based on 2019 data, if we put 2020’s possible inflation rates (at least 0.05% to 1.00 % per month) into a geometric progression, we can see that it may be hard to reach a CPI target below 9 percent. If CPI turns out to be 1% or higher for a couple of months, this time it would have to turn out to be lower than 0.5% for the rest of the year.

“Get ready to feel the excitement with monthly inflation rates in 2020…”

So, it can be said that we need CPI to remain between 0.05 % and 0.7 % on a monthly basis throughout 2020. If this happens, Turkish economy may overcome the basis effect created by constantly positive monthly CPI rates in 2019, thus paving the way for the CBRT to take bolder steps in order to further reduce the cost of funding.

But, we need to see some action. If the New Year brings consecutives price hikes, tax hikes or if new taxes are introduced through new taxation acts, naturally all of these would cause costs and prices to go up higher. Let’s see one more time the underlying risks to 2020 CPI target:

  • Rises in FX rates due to conflicts in domestic and foreign politics, and its inevitable consequence as price hikes,
  • Increasing costs due to higher taxes and its inevitable consequence as price hikes,
  • The fact that we will have to face the negative aspect of basis effect,
  • The fact that consumers/sellers do not exactly believe that inflation is falling, and they would change their demand and pricing behaviour in case inflation hits double-digit again.

It should be clear by now that managing inflation is not managing figures. It is the art of knowing how to manage expectations and perceptions properly. So, this just goes to show that domestic and foreign politics have stronger impact on economic parameters than the Central Bank’s Interest Rate. It seems not possible to maintain a lasting improvement in macroeconomic parameters unless the government establish some ground rules for setting its priorities straight with regard to Public Expenditures and its financing methods, for adopting a strong diplomatic stance as a government, expressing its political statements in domestic politics in the right way, and for drawing up wise laws and regulations