Inflation surprises us this time

The CPI has exceeded expectations with a drastic rise of 135% in the first month of the year. Normally following a similar course to that of Istanbul Chamber of Commerce’s retail figures, CPI turned out to be way higher than expectations this time.

Another interesting development was that the weight of some of the most consumed goods has been decreased in the currency basket, which means the weight of food, transport; housing, clothing and footwear have been reduced in the currency basket. Inflation turns out to be quite high despite the fact that the impact of goods and services that are closely related to the cost of living on the index has been reduced, which means it could have turned out to be even higher than expected if last year’s index was taken into account.

The fact that January inflation data announced by TurkStat turned out to be twice higher than the data released by Istanbul Chamber of Commerce caused some raised eyebrows. The cost of living is pretty high in Istanbul after all. Therefore, in this inflation-ridden city, it seems a bit irrational that we are presented with a figure lower than the CPI which contains more than 400 goods and services. So, I think now Istanbul Chamber of Commerce needs to make a statement or something about this huge gap.

“Tough decision by CBRT…”

Turned out to be above expectations, the inflation figure is now making CBRT decision, scheduled for February 19th, even more critical than ever. Let’s remember that, in the survey of expectations, 12-month inflation was forecasted at 10.04%. This number shows that survey participants won’t reach consensus when inflation falls to single-digit even though they might be in agreement when inflation falls.

Tough just a little, real interest rate shows up when banks are offering 9% interest rate on deposits, especially in an environment where Central Bank has recently declared 8.2% annual inflation expectation. If CBRT decides to cut rates by 50 bps on February 19th, we’ll be officially entering a negative real interest rate process in accordance with both official and market expectations for inflation rate, provided of course deposit interest rates are by 1 point further.

Some investors say, “Inflation doesn’t interest me. Exchange rate USD to TRY… That’s what’s important to me.” However, if we break off the inflation-interest rate relationship, this could have a negative impact on FX rates. Therefore, CBRT’s decision scheduled for February 19th is becomes more critical than ever with the inflation data released today. If you ask me, CBRT seems likely to cut rates by a maximum ıf 25-50 basis points. Any further cut would mess with markets.

Inflation expectations might suddenly go negative if, over the upcoming months, inflation rate turns out to be as high as that of January one or twice. Maybe this is the reason why their weight in the currency basket was changed to begin with.