Inflation likely to remain in double digits this year

Dunya Executive - - Commentary - Alaattin AKTAS Economist

Consumer prices rose 0.81 percent in February, slightly above expectations but not particularly surprising. Even if the montly rise had been 0.69 percent, we were going to see double digits at the end of February, as I previously noted. The consumer price index (CPI) is now at its highest level of the last 58 months, hitting double digits for the first time since April 2012.

Consumer prices have risen 7.05 percent in the last five months. The increase in the first two months of this year is 3.29 percent. The medium-term target was inflation of 5 percent.

Remember how the rise in the exchange rate wasn’t going to affect us? Well, now we see the results. And it’s not over yet.

Since prices declined last year, especially in February and March, albeit at a slow rate, it has an impact on calculations. That effect will soon disappear, but the general trend this year means it will be tough to keep inflation under double digits.

All models show 10% inflation

When considering the level of annual inflation, which was 10.13 percent at the end of February, the most reliable indicator is to look at past performance. However, it’s debatable how sound that would be at this juncture. First, let’s look at the trends of previous years, then examine how and why deviations may arise.

I examined the last 10 months of each year between 2003 and 2016 (since we already have the statistics for the first two months of this year) and developed three scenarios.

In the first, I began by determining the average monthly increases in the indices of the 14 years. These monthly increases indicate end-2017 CPI of 10.07 percent.

In the second scenario, I looked at monthly changes, not the indices. The annual rate I found was 10.29 percent. In the third scenario, I used monthly changes, but disregarded the highest and lowest rates, which gave me 10.15 percent.

All three calculations gave us almost the same rate. Inflation of 10 percent is constant, with only minor, fractional differences.

CPI to see 11% this year

According to our calculations based on the indices, CPI, which was 9.22 percent in January, will only once more see single digits. In July, I estimate it will be 9.55 percent, after which it will very likely reach double digits again.

My theory is that it will be above 11 percent in April and May and again in October and November. Then, in December, we will see a sharp decline, due to the favorable base effect of the same month of last year, but the annual rate will still remain in the double digits.

Factors that could push rate above 10%

Should conditions remain “normal,” we will finish this year with inflation above 10 percent – anything below10 percent should be considered an achievement. There are several factors that may push CPI above 10 percent.

Producer prices have risen 11.5 percent in the last five months. Keeping in mind that CPI rose 7 percent during this same period, a clear correlation has emerged. Though its content and calculations are quite different, we know higher producer prices place pressure on consumer prices.

Another factor is the rise seen in the foreign exchange rate. The dollar has gained 24 percent against the lira in the last five months. As the U.S. Federal Reserve raises interest rates, this figure is likely to grow further.

Meanwhile, our foreign-currency earnings won’t increase much. This year’s decline in tourism may be more severe than last year. Is not a scarce currency going to be expensive? As the exchange rate rises, we will see more intense pressure on inflation.

And then there is politics. Whatever the outcome of the referendum on April 16, changes will occur in the Turkish political sphere and we will be discussing an early general election. Politics will affect the economy, adding more pressure on inflation.

So what if things get a little looser? Businesses have already entered the market, with cost increases reflected in prices. Even if the economy is stagnant and profit margins are narrow, price rises are breaking records. If things improve and demand rises a little, then you can imagine how far prices will rise.

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