Inflation targets have lost their meaning

Dünya Executive - - COMMENTARY -

The medium-term economic program from 2018-2020 projected a 7 percent increase in the CPI this year. With an increase of 6.39 percent in the first five months, more than 90 percent of that has already been “realized”.

The Central Bank raised its forecast in both of its inflation reports this year, first to 7.90 percent, then to 8.40 percent. Even with the latest increase, the 6.39 percent still accounts for three-quarters of the updated forecast.

In the first quarter, inflation remained below the previous year but gained such momentum over the last two months that neither the inflation target nor forecasts have any meaning anymore.

Won’t be a surpr se to see new h stor cal h ghs

As we underlined last week, rising consumer prices over the last five months pushed the CPI to a new record high, based on the 2003 series. The annual CPI rate is 12.15 percent. Think of it as the silver medal over the last fourteen and a half years – the gold medal is still on the horizon. Foreign rates haven’t reflected on prices outright yet and intermedia­te goods prices will also lead prices higher. Gasoline price increases are also not reflected. To counter rising gasoline prices, the special consumptio­n tax has been put on hold. But after the election, it may be re-instated.

Either way there is a cost: without the tax, the budget suffers while with it, consumers suffer. That cost won’t go away.

So some tough days are ahead for inflation. Apart everything noted above, there will also be a base effect kicking in in the coming days.

Consumer prices in June last year declined by 0.27 percent. Is it possible we’ll see a decline this year? Producer prices, on the other hand, increased by only 0.07 percent during the same month. After a record increase of 3.79 percent in May, can we pull the PPI back to near zero like last year?

Forecast ng has become nearly mposs ble

Inflation will be primarily defined by the trend in the foreign exchange rate. But what will be the biggest factor defining that trend?

Completing the elections should offer some relief but the result could make things even more complicate­d. If the parliament­ary majority is formed by the current opposition and the presidency remains in the hands of the current president, Turkey will face an unpreceden­ted problem. Executive power will be in one hand and legislativ­e power majority will be in another.

We won’t be better

It is not possible to predict where the foreign exchange will go or how high inflation will climb in such a case. But we can comfortabl­y predict that we won’t be better off than we were last year.

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