Inflation is set to fall
► But by how much exactly? Clearly, the favorable base effects will bear on annual inflation. As such, the (much) earlier prediction of visiting 15 percent annual CPI by midsummer has already been vindicated.
► That much is (was) to be expected. Unless demand picks up all of a sudden, and the exchange rate jumps to the sky again, annual inflation is set to fall, if only on account of the base effects.
► Take September for instance. There is a very large base effect awaiting there, a base effect that might curtail more than 3.5-4 points from annual inflation. Actually, on the basis of lower food prices and exchange rate developments, both the CPI and the PPI fell by three percentage points in June alone. The core is also moving in tandem although there is some stickiness in the services inflation.
► Oil prices help, but mostly due to their secondary effects. Otherwise, oil is directly important for the PPI, not for the CPI.
► That said, what comes in one month may also go in one month. There have been delayed price hikes that have now been set in motion: electricity, petroleum products, even sugar. Furthermore, tax cuts have ended for car and durables’ sales.
► Yet another factor that might prove to be important is the increasing likelihood of financing the soaring budget deficit via money printing.
► All in all, there will be around a 2 percent annual increase next month. In September, the CPI is likely to fall to 11-12 percent annually. The rest is unknown.
► What is clear from the news about the CBRT is there are rate cuts ahead. I expect at least 100 basis point cut in the MPC meeting on July 25. This will be the first step of sequential rate cuts if everything stays put.
► I also think overseas investors will accommodate rate cuts. Because inflation will fall under normal conditions, and because the lira looks stabilized, and also because the Fed is also about to initiate an easing cycle, why not cut rates indeed? The problem lies with politics more than economics.
► Exchange rate stability; that is what matters most.