Fatih Özatay, PhD - [Archive]

Inflation must not be ignored 22/03/2012 - Viewed 1675 times

Purchasing power of the lira almost halved since January 2005, when six digits were deleted.

Year-end inflation target is 5 percent. The Central Bank of Turkey (CBT), however, estimates that inflation will reach 6.5 percent at the end of the year. In other words, the CBT expects a 4-point drop in inflation compared to the end of 2011. There is an agreement among analysts that inflation will decrease year-on-year by the end of 2012.

There are two factors shaping the inflation expectations. First is that, the pace of economic growth will be considerably lower compared to 2011. This implies that the demand pressure on prices will be weaker than it was in 2011. Second, rapid depreciation of the lira which was encountered in late 2011 is not expected for 2012. In fact, some argue that, should the tension in international markets continues easing, lira might even appreciate.

Still, most analyst estimate that inflation rate will be above the CBT forecast of 6.5 percent. The common expectation for 2012 inflation is around 7.5 percent. The interesting part is that, both the CBT and analysts expect inflation rate to be significantly above the official target. This does not seem to bother anyone but a few. This would be acceptable if the official target was met in the previous year. 2011 inflation, however, was 5 points above the target (inflation rate was targeted at 5.5 percent and realized at 10.5 percent). 

Purchasing power in decline

Recent developments signal that inflation might reach beyond expectations at the end of 2012. Chief among these developments is the rise in the price of crude oil and thus those of gas and diesel oil. These might be reflected on the goods and services prices via transportation costs. Second, the upwards trend in the value of lira since the mid January has come to halt. Lately, lira has been depreciating, through it is uncertain whether or not this trend will prevail. Third, growth estimates for 2012 have been revised upwards, though slightly. The impact of the latter two is insignificant for now, but might strengthen. In early 2005, six digits were deleted from the Lira and the unit “kurus” came back in our lives. We used kurus frequently in our daily transactions. Recently, however, we are not much interested in coins. Is this weird?

It is not, actually. Between January 2005 and February 2012, consumer prices increased 1.77 times. That is, the purchasing power of 100 liras in 1 January 2005 decreased to 56 liras, as of 1 March 2012. Purchasing power of the lira almost halved since January 2005, when six digits were deleted.

Inflation targets are (actually should be) announced for a reason. Let me point at three figures and stop there: Concerning the inflation targets between 2005 and 2011, consumer prices should have increased 1.48 times. Instead, they increased 1.75 times. This implies that inflation rate stood 27 points above the target.

This commentary was published in Radikal daily on 22.03.2012