No surprise in CPI, and none in January

Dünya Executive - - COMMENTARY - Alaatt n AKTAS Economist

Consumer prices fell by 0.40 percent in December. Thus, the increase in 2018 was 20.30 percent. There was no surprise: the expectatio­n was for CPI to head in this direction. The second part of the headline is actually more important. The no surprise in January does not mean that prices will fall in January too; I mean it will be no surprise that prices will rise again. That is the normal course under the current economic conditions.

So rather than asking why prices will rise again in January, the relevant question is: “What happened in November and December that led to a fall in prices?”

The fight against inflation program was announced in mid-October and everyone was invited to participat­e in this struggle by making at least a 10 percent discount in prices. No one except for a few minor players really participat­ed in the campaign. The biggest impact on the 1.44 percent fall in the consumer prices in November was the SCT and VAT discounts in automotive, white goods and furniture. The tax advantage also included housing but housing prices are not included in the CPI, so it had no impact. Nearly 1 point of the 1.44 percent decline in the prices derived from automotive alone.

The tax deduction was made as of November. So, the price of a product dropped from 100 to 90, and stayed as 90 during December. Price increases or sales apart from the tax deduction are a separate issue. Therefore, the tax reduction had no effect in the 0.40 percent fall in December.

The price decrease in December was mainly due to cheaper fuel oil prices. There was a 2.56 percent decline in the transport group that includes fuel oil and cars. And the reflection from this group on the overall index was 0.44 points. The reflection of the 4.08 percent decline in the clothing and footwear group on the index was 0.29 percent.

What happens this year?

The first thing to note is that nothing can be said at this stage for the whole of 2019. It is possible to approximat­ely predict what may happen in the first quarter of the year. But all year? No.

The tax advantage for automotive, white goods and furniture was extended for three months. Therefore, there will be no tax-related increase in the price of the products in these sectors. However, there will be increases in car prices due to new model launches and the end of the extra discount in December. But until 2019 models are released, the price of the 2018 model cars will continue to be compiled, and the prices will be relatively low.

In other words, a price reduction based on the tax advantage in the first quarter and thus a CPI decrease in these three sectors should not be expected.

Our hands are tied on fuel prices, the product that will affect the CPI most. When the exchange rate rises or oil prices go up, a fuel price hike is inevitable.

The exchange rate is rising, especially last week this situation appeared to be evident. The decline in oil prices has stopped, and there has even been an increase in recent days. It’s a killjoy to have these two factors coming together. Therefore, if the trend in the following few days continues, we may see a CPI increase in January.

Last year, the CPI increased by 1.02 percent in January, 0.75 percent in February and 0.99 percent in March. So the rates that will form the basis for this year are not so high. Therefore, this year’s monthly rates can increase the 20.30 percent rate at the end of the year.

Dark after March

When we say dark, we mean it’s almost impossible to make prediction­s. According to the results of the March 31 elections, the economic policy may be revaluated; we do not know. We do not know if there will be a new extension in tax cuts in automotive, white goods and furniture, which will expire on March 31. But we know that the April CPI increase may be at a record level if the return to the normal tax level in these sectors is done at a time on April 1, without phasing out.

So, a prediction can be made for the first three months. For after March, we need to wait for the evening of March 31.

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