Inflation outlook: A drastic fall in Q3 2019 to c. 15%
► It may drop down all the way to c. 15% n August
2019. Interest rates w ll follow su t, albe t w th some slugg shness. The damage s done though.
► ‘The core nflat on and the exchange rate graph c’ dep cted here s the most opt m st c feature of the recent nflat on pr nt. For we know that as the exchange rate basket apprec ates, core nflat on w ll beg n track ng t albe t w th a lag.
► The large d screpancy between the PPI and the CPI means there s accumulated and delayed nflat on that w ll accrue n the com ng months, yes. But t doesn’t mply that the CPI w ll go all the way up to the PPI, no. Some cost ncrease w ll never pass on to the consumer because consumers can’t pay. ► Inflat on w ll fall no matter what. That s unless there s another currency shock. The relat ve stab l zat on of the L ra + a drast c fall n consumers’ demand w ll quas -automat cally br ng t down somet me next year.
► Th s s the m rror mage of my t me-honoured argument, an argument I had put forward for the f rst t me n March 2018, to the effect that the economy wasn’t overheat ng; on the contrary t was automat cally cool ng off.
► That sa d nflat on has st ll b te. It w ll go up poss bly to 27-28% n Q1, and t may not fall eas ly ahead of elect ons n late March 2019, but afterwards t w ll drop down. ► For nterest rates, what matters s the spread between expected and real zed real nterest rates. Expectat ons are always well-behaved except for a few ep sodes, but are they borne out by ex post real zat ons of nflat on? No, and th s s key because t ra ses the ssue of mak ng a dec s on: hold TRY depos ts or sw tch to FX assets.
► Inflat on expectat ons should be real st enough to allow us to come up w th a reasonable set of ex ante real rates. If expectat ons are correct, the current real rate s h gh enough not to requ re any further pol cy rate h ke.
► Depos t rates to w ll fall, slowly but surely. Synd cat ons are be ng rolled-over and there s no rush for a depos t collect on war.