Inflation heads south, for now
There is now a good chance that the consumer price index (CPI) will fall below 10 percent earlier than expected, according to the consensus estimate. Barring an exchange-rate shock, the year-end print will likely be between 8.5 and 9.5 percent. Inflation now stands at 10.9 percent, and come July there may be a 9.5 to 10 percent annual post, due to the favorable July base effect. Last year’s July print was 1.16 percent, a record high since the base year of the current CPI series, 2003. Annual inflation may slow by 1 percent.
The last 12 months’ moving average was at 9.36 percent. I believe this is where we are effectively heading as a first benchmark. The reason is obvious: The main driver of high inflation was the pass-through effect, and the exchange rate pass-through of last year’s second-half exchange-rate shock has now completely withered away.
The second culprit is always food and non-alcoholic beverage prices. Turkish agriculture is now wide open to imports, a policy no developed country has ever resorted to. Tariffs have been drastically reduced on livestock, wheat, barley and corn. These reductions are huge and range from 135 percent to 26 percent for livestock, and from 130 percent to 25 percent for corn, to name a few. They will have a shortterm impact on inflation. Even so, looking at the inflation perspective alone, there is now a possibility that inflation will remain subdued even in the first quarter of 2018. There is also a favorable base effect in the first quarter of 2018 ahead. In the absence of a new currency shock, inflation could be about 8 percent in the first quarter of 2018.
However, the trend is upward. The unusual thing is every time inflation borders 10 percent or surpasses it, it leaves a dent in the long memory of the series. It does not automatically revert back to the old mean, which was 6.5 to 7 percent. It went up by a percentage point. So, the new normal is about 8 percent – a high mean, looking at the cross section of emerging markets.
Inflation on goods against services tells the full story, because it embodies most of the pass-through effect. It will continue to fall, driving inflation down to 8.5 to 9.5 percent by the end of the year, and possibly to 8 percent by the first quarter of 2018. Nevertheless, it appears public spending and consumer expenditures will not be curtailed. If elections are held on time in 2019, this means there are 24 months to go, a long time. I do not know yet the specific mechanism by which this will be rendered possible.