On Tuesday October inflation rate was announced; we learn that the pace of increase in consumer prices is 5 percent. I have not been talking about inflation for a while. Of course the main reason is the serious damage caused in Turkey's economy by the global crisis. It was more interesting to seek a solution for the question what can be done to tackle the rise in unemployment and economic contraction.
Yet there is another reason why I put the inflation subject to the background: in a way, the subject lost its newsworthiness. Before I gave a break in my commentaries in Radikal daily in 2001, I used to assess the monthly inflation figures the day after it was announced. This went on like this in 2000 and 2001 until May. For those having a macro perspective on Turkey's economy, inflation was one of the most fundamental topics.
I remember that we had a discussion in the Central Bank during the meetings to set the 2002 inflation target. As a result of that discussion, 35 percent inflation rate came out. At the end of 2001, inflation rate reached as high as 70 percent. The target estimated a fall in half. What is more, a new monetary policy regime, implicit inflation targeting, was put into effect. Credibility of this regime was also a matter of concern. Anyway, 2002 inflation realization came out below the target and stood even below 30 percent. Taking those years into account, it is obvious that the progress made considering inflation is striking. However, this striking progress must not make us neglect some important points.
Rapid fall in inflation in the 2001-2006 period was ensured in the face of rapid growth. We are talking about a fall from 70 percent in 2001 to 8 percent at the end of 2005 and 10 percent at the end of 2006. But in the given period, growth rate transcended 7 percent and unemployment rate neither fell nor rose. Of course inflation would not have fallen without the disciplined fiscal policy implemented in that period. Of course abundance of international liquidity contributed to the fall inflation. However, the opposite also applies: this performance could not have been achieved if we had a vague monetary policy targets and method of which is uncertain. It is hard to prove, but I also believe that such success in reducing inflation could not have been achieved if an alternative monetary policy regime was implemented.
Then, inflation rate became rigid and floated in the 7-12 percent, in particular in the 8-11 percent band. As of 2008 winter, inflation rate decreased rapidly. As the Central Bank suggests, year-end inflation will stand around 5.5 percent. The important role the global crisis played in this should be noted. Both domestic and foreign demand coming to a halt as well as the global fall in commodity prices contributed significantly to the fall in inflation rate. To put it differently, the recent fall in inflation is different than that in the 2002-2006 period in terms of its dynamics and drivers. Currently, there is the risk of an upward pressure on inflation with the beginning of revival in developed economies and in Turkey. This should also be noted.
Most central banks are accused of shutting their eyes to the swelling of asset prices. However we must note that FED was the one who turned a blind eye to this issue. FED does not implement inflation targeting regime as well. Before cursing the inflation targeting regime, this point must also be taken into account.
Of course we can discuss what revision can be adopted against the swell in asset prices or against rapid credit expansion. We must also consider that inflation can rise slightly with the stepping off of the facilitating factors. However, we must not forget the role inflation targeting regime played in the current state of play in inflation.
This commentary was published in Radikal daily on 05.11.2009
