Will Inflation Fall After July?

Will Inflation Fall After July?


Turkey’s inflation rate, which was supposed to go down “after March”, is now projected to fall after July.


In May last year, CPI was 0.04%, which means that this low figure will not be included in the calculation of annual inflation rates to be released in May this year. Two month-inflation rates above 9% of the last year are included in May, June and July figures. As for August this year, these high numbers from last year will not be in the index, so we will see a sudden decline in inflation due to the base effect. If monthly inflation comes in at around 3% every month this year, the “inflation will fall after July” forecast will mean something. Here’s an example:


If inflation rate comes in at 3% each month starting from March this year, in the 12-month series as of September, the CPI will be around 53% in August. Based on the same assumption, if the CPI comes in at 3% every month as of March this year, inflation rate could suddenly hit 50% in August due to the base effect, since annual inflation would be 72% in June and 62% in July. If the monthly figures turn out to be lower this year, obviously, this downward trend will be more apparent.


Needless to say, these expectations can become a reality if the Central Bank continues to keep foreign exchange rates successfully in check, if there are no new tax hikes, and no new wave of inflation in the world due to logistics troubles, not to mention a decrease in demand because of the credit crunch.


History tells us that projections might seem correct on paper, but such models do not tend to function properly unless exchange rates are allowed move.


With the pressure of narrowing funding opportunities, the Central Bank is forcing banks to increase their deposit rates. Some banks offer interest up to 53%. If such interest continues for a period of six months, it actually brings a very satisfactory return. However, the popular belief is that exchange rates will rise rapidly after the election therefore most people cannot dare to put their money in interest bearing accounts. FX rates, which are likely to rise suddenly and rapidly, would of course bring bigger profit than an earning from a saving account that pays 50% interest per month.


We have only 12 days until the local elections. I just hope the result will be a good one for Turkey.