Single digit in inflation – maybe – next winter

Dünya Executive - - COMMENTARY - Alaatt n AKTAS Economist

Consumer prices increased by 0.99 percent in March. As the increase was below the rate from the previous year – despite being a minor difference – the annual inflation rate, which was 10.26 at the end of February, declined to 10.23 percent by the end of March.

The inflation rate for March is not too far above expectatio­ns. It’s even 0.03 points less than last year’s rate. But an inflation rate of 0.99 percent is well above the average inflation rate for March.

More important is presumably the fact that expectatio­ns and pricing behaviors deteriorat­ed. A major factor behind this deteriorat­ion is the increase in foreign exchange rates. We can’t say that this increase has no negative impacts on the economy.

Foreign exchange rate increases are not just some figures on paper; they badly effect the economy and pull prices upward. This leads to a deteriorat­ion in the public’s perception of the economy.

Pr ces only sl ghtly affected n March

The foreign currency basket of dollar and euro increased by 6.65 percent in the first quarter. The CPI increase came in at 2.77 percent for this period. The Domestic Producer Price Index, on the other hand, increased by 5.29 percent in the first quarter.

Foreign exchange rate increases reflect immediatel­y on producer prices but generally much later and with a less dramatic effect on consumer prices.

Intermedia­te goods prices for the producer price index should be monitored more closely. Intermedia­te goods prices increased by 1.86 percent in March, 5.38 percent in the first quarter and 17.58 percent annually by the end of March.

As we underlined several times, rather than associatin­g the total producer price increase with CPI, it gives much healthier results correlatin­g the CPI with intermedia­te goods prices.

Therefore, one should expect that the rise in intermedia­te goods prices in the first quarter and annually when compared with last year would eventually reflect on consumer prices by a certain amount.

What’s the outlook for CPI?

We have said that consumer prices won’t be too volatile this year and the general trend will be downwards. We still maintain this outlook.

However, our expectatio­ns regarding “not too volatile” rates have changed significan­tly, and it’s not just our expectatio­ns that have changed. There is a general wind of change blowing for the estimation­s.

It was just the January figure on the table in February and we had estimated that inflation would fall down to single digits in March and may even fall below 9 percent in the last two months of the year.

We had revised our estimation­s in March upwards. But after TurkStat released the March figures, our estimation­s changed significan­tly. Now it seems unlikely we will see single digits until the end of October. We will see a horizontal trend over the coming months. We estimate that the annual inflation rate will float between 10.0510.50 percent for the period between April and October.

It is possible to see a single digit in the last two months and we may close the year with an inflation rate of around 9.50 percent. But for now, it’s safer to say that we will close 2018 with a CPI around 10 percent.

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