TR Monitor

Inflation sweeping over, and it will continue

- Alaatt n AKTAS Economist

We have lost the grip on inflation, big time! According to Turkstat data, consumer prices rose by 2.30 percent in August and domestic producer prices rose by 6.60 percent.

Now, it doesn’t make sense anymore to compare these figures with previous years. August is a month of small increases in consumer prices, even declines some years. But a rise this year!

To see the difference, consider this: All increases in domestic consumer prices – 2007, 2009, 2012, 2014 and 2015 – in August were below this year’s figure. Think about that!

The Consumer Price Index (CPI) for the first eight months rose to 12.29 percent while the domestic producer price index (PPI) reached 25.32 percent. Domestic producer prices rose by 25 percent in eight months…One can’t stop thinking: “Good that the foreign exchange rate increases don’t effect the prices; what if they had!”

The annual CPI increase is on its way to 20 percent. But we should also say that it will hardly stay at that level.

Annual CPI rose to 17.90 percent by the end of August. The price increases during the last four months of last year was 5 percent. If we repeat that this year, annual CPI will remain at 17.90 percent.

But how will we maintain inflation for the remaining four months of this year at 5 percent after August CPI came in at 2.30 percent – well above the 0.17 percent average over the last three years?

We won’t be able to do it! That’s why we say that it will be difficult to maintain inflation at 17.90 percent. Looking at the current situation and the outlook, 20 percent should be considered as a base figure for yearend CPI. How far beyond that? It’s an open question.

There are solid reasons that may spur the increase in CPI. Domestic producer prices surely reflect on consumer prices generally, but some industries stand out in this regard.

The biggest pressure on domestic PPI is from intermedia­te goods and the energy sector. Intermedia­te goods prices rose by 8 percent in August and the eight-month increase is at 29 percent. Over the past year, intermedia­te goods prices rose by 39 percent.

Energy prices rose by 6 percent in August, 33 percent in the first eight months and 42 percent in the last 12 months.

Is there any consumer goods producer who doesn’t use intermedia­te goods or energy above all else?

How can one argue that these annual price increases of 39 percent and 42 percent won’t reflect on consumer prices?

Therefore, we have to remember that domestic producer prices didn’t reflect on consumer prices immediatel­y. And even if the increase in producer prices stops, the accumulate­d increases will lead consumer prices to increase further.

But the point is, no one expects producer price increases to stop. As long as the foreign exchange rate increases continue, there is no sign of a decline. Producer prices will continue rising.

Why is the Central Bank so silent?

The Central Bank made the following remarks in its latest announceme­nt: “Recent developmen­ts regarding the inflation outlook indicate significan­t risks to price stability. The Central Bank will take the necessary actions to support price stability. Accordingl­y, in line with the previous communicat­ion, monetary stance will be adjusted at the September Monetary Policy Committee (MPC) meeting in view of the latest developmen­ts.”

The MPC meeting is on September 13. This announceme­nt means that the Central Bank will remain silent until that date. But isn’t it better to speak up now?

Is it the interest rate they mean? Or will there be a magic wand to restrain inflation? We can’t know. Why didn’t you raise rates right after Turkstat data was released? Why do you prefer to wait for the meeting?

“We will make an announceme­nt and markets will react.” If that’s what you think, it is now history.

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