An extension of tax breaks is inevitable

Since November, VAT and SCT reductions have been applied to automobiles, white goods and furniture. The discounted tax will be valid until the end of the year, at which point the old rates will be re-introduced. However, the price development in November showed that it will not be easy to put an end to the practice immediately, especially when elections are so close and there is the risk for prices skyrocketing.

We wrote about this issue when TurkStat announced the price indices of November. The CPI fell by 1.44 percent, mainly due to the tax cut-induced reduction in prices. 1.2 percentage points of the 1.44 percent consisted of price declines in automobiles, white goods and furniture. In fact, the price reduction thanks to the tax breaks on automobiles alone contributed almost one point to the 1.44 percent decline.

With the decline in oil prices and exchange rates, price cuts were also made in fuel. The discount on petrol and diesel also brought the CPI down by 0.1 points. Cumulatively then, the effect of the tax cuts and cheaper fuel comprised 1.3 points of the 1.44 percent decline, leaving a mere 0.1 points in other goods and services. What if the tax reduction ends? If the tax breaks on automobiles, white goods and furniture are removed at the beginning of the year, and if taxes are immediately raised to normal levels, what will happen is obvious: If a series of extraordinary conditions that will put prices under pressure do not kick in, the price drop in November will be replaced by price increases. This time, there will be a higher rate than the decline, because math will come into play.

The math is straightforward: If the price of any product is reduced from TRY 100 to TRY 90 (the 10 percent discount) then the rate of increase is not 10 percent when the price is increased to TRY 100 again. From 100 to 90, the ratio is 10 percent; but from 90 to 100, the rate is 11 percent.

Thus, if the tax advantage is removed in the new year, the prices of the products affected – automobiles, white goods and furniture - will experience a very high increase which will push the CPI higher than the 1.2 point reduction in November.

Moreover, those who made socalled discounts within the context of the total fight against inflation will bring their prices back to their previous levels. In fact, we will see the correction of the discount, whether an actual discount was made or not, and the ratio will be theoretically above 10 percent.

Expect a new record for January CPI

The average increase in CPI in January is 1.13 percent. The increase last year was 1.02 percent. The highest rate ever seen was 2.46 percent in 2017. Removing the tax break at the beginning of the year, as expected, will in itself add at least 1.4 points of inflation. And because the price reductions of at least 10 percent have ended, there will be an effect on the CPI that we cannot calculate at this time.

We will see a considerable CPI