Deficits and unemployment
Clearly, inflation will fall on an annual basis until the last quarter. Then, depending on demand conditions, currency stability, the existence of a substantially new program – or lack of it thereof - it will rise again, on an annual basis. I stick to the 13-16 percent (a rather large) band.
Unprocessed food prices rose again. Food inflation has now stood at 29.77 percent for the last 12 months. It is about 10 percentage points higher than the head-on CPI. Vegetables and fruits took the lead with a 9.1 percent monthly increase, betraying the fact that agricultural produce faltered anew. Vegetables are a mess with a 90 percent rise in the last 12 months.
Core inflation continues to fall albeit very modestly. It is hard to tell whether the pass-through effect remains stickier than expected because the exchange rate jumps (locally, that is in the neighborhood of 5.50) from time to time, renewing the exchange rate effect to some (small) extent.
However, consumer durables display a drastic fall. Hence, if we look at the post-September developments, the annual drop in durables’ prices has added up to 12 percent, suggesting the presence of a slowly dying exchange rate effect.
On the other hand, domestic producer prices and consumer prices are still at a considerable distance from each other. Producer prices have been falling since October, but in March the sequential fall has come to a halt.
As with food inflation and CPI, here the difference is about 10 percentage points also. What will happen to the accumulated/delayed CPI response to already extant cost pressures when and if demand recovers?
There is no way I can conclude that inflation will recede to low double-digits that quickly. It may, but then it may not, depending on how economic recovery unfolds.
There is no reason why the CBRT would cut its policy rate if it bases its decision solely on inflation and if we judge from a 12-month CPI perspective. We are talking about a 4-year consecutive double-digit inflation even if the exchange rate remains in the disciplinary box of 5.70-6.20 by the end of the year.