On inflation once more
► Let me be specific: I expected 13-17 percent CPI by the end of 2019. That was my broad expectation band in January 2019. I had at that time tended towards 16-17 percent. Then, on account of favorable base effects and the observation that domestic demand would remain more subdued than envisaged for a longer span than anticipated, I tended towards 13-14 percent.
► Now, I think everything is possible, and although there are rather large favorable base effects awaiting us, currency volatility and ongoing pervasive producer price inflation could lift CPI towards the upper bound. 17 percent is possible despite negative GDP growth.
► Why is that so? First, food prices have by and large decoupled from world food prices. Second, food price increases have become more widespread, i.e. prices of 294 food items went up last month compared to the 270 of the previous month. The annual increase stands at 31.86 percent. As such, the very limited CPI decrease, which may be due to the new way CPI is measured now anyway, isn’t indicative of a fall.
► Third, exchange rate stability coupled with CDS stability is key here, too. Unless the upswing-downswing-FX reserve depletion, TRY interest rate increase/decrease roller-coaster comes to an end, there will be no clear foresight.
► Fourth, producer prices reflect currency movements very quickly. The PPP annual rate of 30.12 percent indicates that there is still delayed/accumulated consumer inflation ahead.
► Manufacturing, mining, electricity, gas, water prices are all up. With electricity and gas prices up by 57.87 percent on a 12-month basis, there can be no meaningful talk of disinflation.
► This implies a higher than warranted ex ante and ex post real interest rate if the exchange rate is to be stabilized. This has been happening all the time; that is, temporary and somewhat “artificial” devices put to use to render interest rates tame produce the opposite outcome in the interim term.
► At 5.81 percent current ex ante real interest rate, is anyone happy? That metric was 2.50 percent in January and 2.67 percent in February. The numbers speak for themselves.