Inflation high in Turkey despite the fall in oil prices

Despite the fall in world commodity prices, primarily oil, in Turkey inflation rates cannot be pulled down to the desired level. Central Bank Governor Erdem Başçı announced the Inflation Report last week, saying that they had expected a fall in inflation in October, but the opposite happened.

In October, despite the market expectation of 1.78 percent, the consumer price index (CPI) went up to 1.90 percent. With this figure, last year’s inflation rate also went up from 8.86 percent to 8.96 percent compared to the previous month. The annual increase in producer prices has reached double digits with 10.10 percent.

Başçı said inflation had now entered a downward trend, but a steeper fall looks difficult until the end of the year.

The reason is that CPI increases were very low in November and December last year, so markets do not expect a decrease in annual inflation until the end of this year.

The Central Bank, with the latest revision it made last week, changed the dot target in the inflation band to 8.9 percent and the top limit of the corridor to 9.4 percent. Thus, even though one week has passed since this revision, we can say there is no possibility left for the dot target to be reached.

The increase in food prices that plays a significant role in the rise of inflation went down in October below the average of past periods, but again it has a high course.

On the other hand, the fall in world oil prices has started to make positive contributions to energy prices and inflation. While fuel oil prices are expected to fall, this situation will also positively affect inflation next month. But despite this, it is separately noteworthy that inflation is on the rise.

Despite the restriction of domestic demand, the fall in world oil prices and the halt of the excessive increases in foreign exchange rates, the fact that inflation is still at the threshold of 9 percent makes it quite hard to make predictions for the future. Even though Başçı said these factors would decrease inflation next year, this is definitely an optimistic opinion, because the markets do not quite expect this low course in world oil prices to continue for a long period.

The ISIL factor

Even though it has a low course, in parallel with the setting of the FED’s interest rate increase, possible increases in foreign exchange rates may curb this fall. Expectations that the dollar exchange rate will rise to 2.5 Turkish Liras can be considered bad news for inflation.

I think an important factor that the Central Bank does not take into consideration is political developments. While it is still not clear whether or not Turkey will join the Western coalition formed against the Islamic State of Iraq and the Levant (ISIL), Prime Minister Ahmet Davutoğlu has said “We will neither enter the war nor stay out of everything.” Turkey, through Western pressure, may be made to join this coalition and may have to go to war against ISIL.

Actually, regardless of Turkey entering or the war or not, it is possible that the atmosphere of clashes will infiltrate into Turkey. This possibility could disrupt the foreign exchange rate and inflation calculations.

These threats could totally disrupt the economic balances in the country.