Themes around Turkish inflation
At 0.6 percent, January inflation was slightly higher than expectations of 0.5 percent, bringing the yearly figure to 10.6 percent. The annual rise in the core I index, which excludes items subject to volatile price movements, was 8.4 percent. The headline and core figures have reached their highest levels since November 2008 and May 2007 respectively.
These numbers suggest that solid growth, energy prices and the weak lira are taking their toll on inflation. Moreover, food inflation was not that high, hinting that the dismal January weather could affect food prices in February. Therefore, inflation may not have peaked yet. In any case, we are likely to see double-digit inflation until May. But all of this is in line with market expectations and therefore not as exciting as Tuesday’s Inflation Report.
We now know for sure that the Central Bank’s first priority is ensuring growth this year because they see a slowdown in economic activity as the greatest risk facing the Turkish economy. According to Governor Erdem Başçı, they have increased their end-year inflation projection to 6.5 from 5.2 percent because attaining the 5 percent target "would require quite a strong and comprehensive monetary tightening, which would result in a serious slowdown in economic activity".
I beg to disagree. I would argue that the main threat to the Turkish economy is an external financing crisis, which would lead to a crash landing. I see some slowdown as necessary because it would allow the current account deficit to adjust. The Central Bank is betting on abundant capital flows fueled by easy monetary policies in developed countries to ensure the deficit won’t be a problem.
Despite this enlightening Inflation Report, which has also revealed Turkey is not an inflation targeter for all practical purposes anymore, the major inflationary development of the week was the Turkish Statistical Institute’s (TurkStat’s) changes to its methodology for calculating the consumer price index (CPI), on which inflation is based.
In addition to the annual updating of the weights of the goods in the index and a slight change to the methodology of calculation of food prices, which will decrease the volatility of food inflation, TurkStat announced that they had started making quality adjustments to certain items such as cell phones.
I should note that this is standard practice. But not revealing the methodology or the items undergoing adjustment is not! Moreover, TurkStat officials have reportedly told economists these adjustments have been going on for some time even though Başçı has stated the contrary several times.
The quality adjustment will likely affect only a small number of items, less than 10 percent of the CPI basket, and the changes would reduce inflation only marginally. But if inflation comes in significantly less than expected over the next few months, conspiracy theorists will nevertheless begin to grumble.
As if the Central Bank did not already have enough troubles already!