Inflation turns out to be lower than expected…Let’s not slack off now…

Here’s why we should not slack off: When Istanbul Chamber of Commerce released its cost of living index data, I instantly realized that we still have a long road ahead before we achieve single digit inflation that we all have deeply longed for.

As CPI numbers and the figures released by Istanbul Chamber of Commerce rarely turn out to be different than each other, I had suspected that we could face a 0.5% Consumer inflation or above in February. Inflation rate would eventually reach 12%, and that was exactly what happened, despite the lower-than-expected CPI.

The current trend in annual inflation doesn’t exactly match CBRT’s recent statements. It’s almost impossible for the CBRT to cut rates just based on these figures. To put it more clearly, Central Bank should absolutely avoid reducing interest rates CBRT continuing to cut rates would result in two types of major costs unless single digit inflation expectations are properly formed. The first cost CBRT will incur is: the erosion of trust, which means a rate cut may do more harm than good if people and markets lose their trust and confidence in Central Bank decisions. The second cost CBRT would incur is that Central Bank’s struggle for keeping the exchange rates low with borrowed foreign currency loans by using the Swap markets would increase both the volume and the cost.

My predictions remain unchanged since the end of the last year: “Annual inflation rate in Turkey should not exceed 0.7% throughout 2020.” In other words, if inflation turns out to be higher than 1% in any month during 2020, Turkish economy would stray too far from its path, therefore, inflation rate would need to turn out to be negative at least for two months in order to retake the course to the desired goal, which is not an easy thing to do under the current conjuncture.

The current inflation rate is below 0.7% but it will have to improve in the following months as it has already started the New Year with a percentage above 1%.

“Inflation threat remains alive…”

One more warning: there is a high likelihood that the general level of prices will increase as long as we become unable to access to supplying countries that produce intermediate goods in China for relatively low prices. It looks like we will have to buy spare parts, intermediate goods or investment goods from countries other than China for relatively higher prices.

Some people think that Turkey is poised to benefit as coronavirus outbreak continues. I feel I must remind them of this little fact: Already working at almost full capacity, Turkish industry would inevitably face major capacity utilization issues if production demand shifts to Turkey. If Turkey can find a cost-effective way of retaining its new customers, we can actually benefit from this virus-induced economic slowdown China is going through right now. Turkey has a strong sub-industry and mechanical sector, not to mention its powerful textile industry as one of the world’s largest textile producing and exporting country.

However, if all of this turns out to be nothing but a conjunctural blessing, I’m afraid it may cause idle capacity and inflation over the medium term. I feel it’s my responsibility to voice this possibility everybody ignores. This process needs to be handled very carefully by the government as well as by professional organizations and associations.

The huge difference between CPI and Chamber of Commerce data doesn’t bode well for the future. Both TurkStat and Istanbul Chamber of Commerce should waste no time in making a quick analysis of the situation.

P.S. The fact that, in a rare inter-meeting move, Federal Reserve cut rates a half-percentage point doesn’t bode well, either. I will talk about this tomorrow.