Impact of hike in petroleum prices on CPI exceeds 1.5 points
times have petroleum prices increased this month? Counting HOW MANY days is enough to understand how many times petroleum prices have been increased in March. How will petroleum prices affect the Consumer Price Index (CPI) if the prices, which are valid today, don’t change? Gasoline, diesel fuel, and liquified petroleum gas (LPG) prices will average at TRY 19.83, TRY 21.82 and TRY 10.83, respectively, if the current prices don’t change. Accordingly, gasoline, diesel fuel, and LPG prices rose by 30.1%, 40.7%, and 16.4%, respectively, in March compared to the February average. The impact, seen as a result of the application of these price hikes in the weight of CPI, is 1.5 points.
The figure will be above this because of the detailed and technical calculations of the Turkish Statistical Institute. The minimum impact will be 1.5 points, but it may reach 1.55 or 1.60 points.
These 1.5 points are the direct impact of petroleum and the hike in petroleum prices alone. The indirect impact will be much bigger, as no goods and services will not be affected by the surge in petroleum prices, especially diesel fuel.
The CPI consists of over 400 goods and services. We only mean three items when we talk about petroleum. The weight of petroleum in the CPI is nearly 5%. The CPI will increase monthly by 1.5% starting in March, even if the price of goods and services – excluding petroleum – doesn’t increase at all.
The CPI monthly rose by 1.08% in March 2021.
The impact of the Russia-Ukraine war isn’t limited to energy prices alone. There are sharp price hikes, especially in food prices.
That’s why these price hikes have transformed into a more destructive situation, with the surge in energy and food prices and TRY devaluation resulting in a double-digit inflation figure. There was a general surge in Brent crude prices that has become more significant with the Russia-Ukraine war. However, Brent crude price isn’t the only factor that raises our costs. We made a fundamental mistake that paved the way for us to buy Brent crude at a higher price and can’t redress it. We lowered the interest rate and caused a foreign exchange (FX) rate jump.
If we hadn’t reduced the interest rate starting from September 2021, ensuring instead that the FX rate would rise at a normal pace, how much would petroleum prices be? All the data is clear. USD/TRY would have risen by 12% from 8.50 to 9.50. That would have been normal. Accordingly, the cost of Brent crude would have increased by 79% as a result of the FX rate increase and the hike in oil prices. A 79% increase from September 2021 petroleum prices would have meant prices at TRY 14.00 for gasoline and 13.00 for diesel fuel. The price of gasoline is currently TRY 20.00 when it should be around TRY 14.00. We are paying TRY 6.00 more. The diesel fuel price is TRY 23.00 when it should be around TRY 15.00. We are paying TRY 8.00 more.
Why do we pay more? Because we reduced the interest rate!