November inflation may be negative

Dünya Executive - - COMMENTARY - Alaatt n AKTAS Economist

The consumer price index (CPI) that Turkey’s Statistica­l Institute has been calculatin­g since 2003 has never seen a decline in November over the last fifteen years. On average, there has been a one percent increase over this period. But for the first time, there is a relatively strong possibilit­y that consumer prices may fall this year.

The main reason for the expected decline is the tax cuts introduced in early November, and in particular the discount in the automotive industry. Of course, discounts in white goods and the furniture sector are also important but considerin­g the weight in the CPI, the effect of the reduction in the automotive sector will be significan­t.

Another factor that may cause prices to decline in November is the Fight Against Inflation Program. Although this program was announced on October 9, the discounts were mostly applied this month due to the fact that large enterprise­s had already set their prices for October, and chain markets do not go for price changes (especially discounts) during the month.

The Fight Against Inflation Program was reportedly supported by almost everyone. However, in October, only the price of 37 goods and services declined; prices remained unchanged in 24 items.

Moreover, prices of 327 goods and services increased.

Accordingl­y, prices are expected to be reduced in November within the scope of the program, and this is likely to contribute to the decline in inflation. Actually, price increases based on the rising currency needed to be rolled back anyway. This was not done. So weights are pointing to a decline. In forecastin­g which developmen­ts may occur in the CPI, we should consider the weighted impact of the various factors. The first five goods and services with the highest weight among the 407 goods and services constituti­ng the CPI represent a 19 percent share while the next five is 10 percent.

Topping the list is rent, with 5.19 percent in the first tier of the weight ranking. Rent increases reached 9 percent in the first ten months. In other words, monthly increases didn’t even reach one percent; a similar trend can be expected in November. The second-ranked cigarette prices made no headway, and will remain so in November.

The biggest factor to lower prices will come from cars, which are weighted third and fourth. Thanks

to the tax reduction, car prices fell by 10 percent. There was also a drop in automobile prices in October but the real decrease will be in November.

In fifth place is electricit­y. It has already been announced that electricit­y will not be raised in November and December.

The first five goods and services are almost one-fifth of the CPI. There will be no increase in prices in these five goods and services, and close to a 10 percent decrease is likely on automobile prices.

So, doing simple math, the 19 percent share of the first five goods and services will mean a 1.9 points decline in the CPI if automobile prices decline by 10 percent. Looking at the second five, water bills won’t change much. Mobile phone charges are not expected to be reduced but there will also be no increase. There are even operators supplying additional talk time. There is no unusual movement in bread prices. Some municipali­ties and chambers have even announced discounts. Diesel prices are not changing but gasoline prices have been reduced two times at a rate of 5 percent. Thus, in the first ten goods and services, there is no price increase

but a considerab­le price decrease.

D scount must be more

When the dollar, which was 3.80 at the beginning of the year, climbed up to 7 liras, everyone made a price increase, fair or unfair. The dollar rate is now below 5.5. Those who used the dollar as an excuse for price increases have remained unresponsi­ve to the decline.

The price drop expected to occur in November will not be due to the fact that those who raised prices under the pretext of the exchange rate will roll back their prices to some extent. Let us emphasize it once more: Even though the Fight Against Inflation will have an effect on the anticipate­d reduction in CPI in November, the actual impact will come from the tax cut.

In other words, the expected decline in inflation in November is based on artificial and temporary measures. Additional­ly, the real problem is what will happen when this tax cut is over. As we mentioned before, it seems not possible to bring the reduced taxes back to old levels. Either the taxes will be raised gradually to a normal level or the reduced rates will continue to be applied until end of local elections.

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