Turkey’s double-digit inflation risk

Inflation figures disclosed at the beginning of the week have once more shown that serious weaknesses are being experienced in fighting inflation. When compared with the rates of last year, it looks like Turkey is at risk of experiencing double-digit inflation in the second half of this year.

In April, consumer price increase exceeded the expected inflation of 1.29 percent to become 1.63 percent. As of the end of April, the annual consumer price increase went up from 7.61 percent to 7.91 percent.

When we look at producer prices, the sharpest climb since January 2014 occurred in April, at 1.43 percent.

It can also be observed that the increase in food prices that Central Bank Governor Erdem Başçı complains a great deal about is continuing. However, apart from food, the increase in energy prices is being reflected on prices. The mobility in foreign exchange rates is also pulling prices up.

Başçı pointed to the positive course of the core inflation and said annual rates would fall in the second half of the year. He reiterated this expectation when the Inflation Report was released last week, revising the annual inflation target from 5 percent to 6.8 percent. The bad news is that the deterioration in core inflation that started one month ago became evident in April. The fall in core inflation came to a halt, making the expected fall in the second half of the year much more difficult.

Last year’s figures - in other words the base effect also - do not give any hope for this year’s inflation. Last year in May there was an increase of 0.40 percent, in June of 0.31 percent, in July of 0.45 percent and in August of 0.09 percent.

It will be difficult for annual inflation rates, which climbed to 7.91 at the end of April, to fall in the second half of the year. Moreover, with the high course of foreign exchange rates continuing, with the increase in world oil prices, with expectations deteriorating further with the effect of politics, we may even reach a point where we will be talking about double-digit inflation figures.
 
Confidence eroding  
 
The inflation data is also causing an erosion of confidence in the Central Bank. Its independence is already seen as at risk, and because this situation is reflected in domestic and foreign markets, the Central Bank has already lost its reputation. With the difference growing between the Central Bank’s inflation targets and the real figures, the erosion of the Bank’s reputation is accelerated.

Governor Başçı had said inflation may drop to 5 percent in the months of April or May. This estimation, which he made at the beginning of the year, did not happen. Last week the new year-end target was announced as 6.8 percent.  

April inflation data disclosed at the beginning of the week had been interpreted by the markets as “the new target.” However, with not even one week passed since it was announced, it has already become an “unreachable” rate.

The erosion of the Central Bank’s reputation further weakens the fight against inflation. While politicians adopt a stance of “a little bit of inflation is no harm,” the Bank’s giving up of the fight feeds the inflationary process.