In the last months we were told that inflation decreased remarkably although nothing had changed in the course of inflation since 2009

The inflation figures for January were released: consumer price index was up beyond expectations, reaching 7.3 percent. Does this imply an upwards trend in inflation? No it does not.

In the last months it was raised that inflation decreased remarkably although nothing really had changed in the course of inflation since 2009. Therefore, we cannot talk about a new trend. It was commented that year-end inflation of 2012 was “record-low.” Indeed, 6.2 percent in December was record-low; but only if you take into account Decembers.

Yet, we have to take into account not only December but also the rest of the year when assessing inflation dynamics. And when we do so, we see a number of observations with CPI inflation at 4 or 5 percent, significantly lower than December’s 6.2 percent. The problem is that none of these were persistent. Starting from 2009, CPI inflation has been floating around an average rate of 7.6 percent. The rate reported for January is quite close to the average. The horizontal line in figure 1 below represents the average CPI inflation since 2009.

The picture does not change if the more common headline inflation (the l index) figures are considered. Besides, headline inflation have not shown an upwards trend; it dropped from 5.8 percent in December to 5.7 in January. Headline inflation on average between January 2009 and 2013 is 5.4 percent. Please note that headline inflation was 0.4 points above the average when commentators argued that inflation eased down to a record-low level.

The inflationary outlook in the coming months will be determined by domestic demand, exchange rate and energy prices. Domestic demand is not likely to put a significant upwards pressure on inflation as it is expected to increase at a small degree in 2013, unless the current policy framework is altered, of course. International risk appetite is rather strong, which is expected to put a downwards pressure on exchange rate. On the other hand, the Central Bank stated that it will prevent the appreciation of lira in real terms. Under the assumption that the Bank will achieve this objective, it is unlikely that exchange rate affects inflation dynamics. The price of crude oil has been in a hike for the last two months. How long this trend will last is uncertain; but if becomes permanent, this obviously will push inflation up.

I previously estimated 2013 year-end inflation at 6 percent. In the light of the available information, there is no need for a revision. But the “record-low” rhetoric definitely needs one. It is absurd sticking to this argument when the picture is as clear as day, don’t you think?

Figure 1: Annual CPI Inflation, January 2009 – January 2013 (%)

Source: TURKSTAT

This commentary was published in Radikal daily on 05.02.2013