Growth has been slowing down, which will ease the CPI. Yet, CPI realization will most probably be significantly above the CBT target.

Thank God, high inflation rates are now an old story for Turkey. Compared to its own inflationist history, Turkey has been enjoying low inflation rates since the beginning of 2004. But please note that compared to its own history were the rates low. For example, go to the webpage of the Central Bank of Turkey (CBT). At the bottom of the homepage, you will see the annual CPI targets and realizations since 2002. The lowest and the highest CPI rates between 2004 and 2011 were 6.4 percent and 10.4 percent, respectively.

Consumer price inflation has been floating within this interval for eight years. Monthly figures are naturally more unstable, but only slightly. In short, we are yet to win the battle against inflation. Turkey’s CPI is relatively higher than that of “rival” countries and this impedes its international competitiveness. I want to recall some points in a commentary from a few weeks ago: Purchasing power of the lira almost halved since January 2005, when six digits were deleted. Between January 2005 and March 2012, consumer prices increased 1.79 times. That is, the purchasing power of 100 liras in 1 January 2005 decreased to 56 liras, as of 1 April 2012.

The second unfavorable development that relates to inflation is that we are getting used to the recent performance. As you might have noticed, on economic news channels the discussions on the steps the   CBT could take are generally concentrating on the growth performance, the recent exchange rate movements and on credit growth. These either do not focus or focus relatively less on inflation. At this stage I am not concerned if this is a result of the current policy scheme of the CBT or it has other causes, though this would be an interesting issue to discuss. What matters is the phenomenon itself. This shift of focus is not good since the battle with inflation is yet to be won completely.

CPI figures for March were not surprising, either. Annual CPI reached 10.4 percent and the rate floated between 10.4-10.6 percent during the last four months. On the other hand, the H and the L indices, which the CBT primarily focuses on, draw a brighter picture. The headline inflation measured with the H and the L indices demonstrated a stable upwards trend between October 2010 and January 2012. At the beginning of this process, annual headline inflation measured with the L index stood at 2.5 percent. In January 2011, the rate reached 8.4 percent. The L index is in downturn since January 2012. The drop is not remarkably high: annual headline inflation as of March 2012 stood at 7.9 percent. Still, it is better than nothing.

The process from now on is obviously of importance. Recent developments can put an upwards as well as a downwards pressure on inflation. As a result of the hike in oil prices, high tax rates and high exchange rate, fuel and diesel fuel prices were raised successively. This was followed by major raises in natural gas and electricity prices. All of these are used extensively during the production and transportation of goods and services. Therefore, the raises will push inflation rate up both directly and indirectly.

On the other hand, growth has been slowing down as I have discussed above. The demand pressure on the goods and services prices will be relatively weak than it was in 2011. This will ease the CPI. When these counter effects are combined, year-end inflation will be lower than it is today. Yet, CPI realization will most probably be significantly above the CBT target.

This commentary was published in Radikal daily on 05.04.2012