If the Central Bank was to make its interest decision according to core inflation

There was an expectation of a 0.5 percent rise in consumer prices; instead, a drop of 0.04 percent was registered. As it is unusual to see a drop in prices in the month of March, this was an important surprise for the markets. 

Together, with this ratio and with the influence of the high rate of last year’s month of March, there was a serious drop in yearly inflation. The inflation rate based on consumer prices, which was 8.8 percent by end of February, dropped to 7.5 by the end of March.

Meanwhile, core inflation, which excluded gold, alcoholic drinks, tobacco products and food, has not registered an important drop. Core inflation, 9.7 by end of February, dropped to 9.5 in March.

This rate is especially important in terms of the Central Bank’s monetary policy. The fact that the drop in core inflation remained very limited while yearly headline inflation dropped considerably has created doubts as to a decision at the Central Bank’s Monetary Policy Board meeting to decrease interest rates.

Despite resilience in core inflation, the expectation that the Central Bank will decrease interest rates in line with the government’s wishes is high.

Yet, a high tendency in core inflation becomes a factor that increases the risks when there is an interest rate cut.

In short, it is a risky decision to have an interest rate cut with this core inflation.

The most important reason for this high difference between core inflation and headline inflation is the excessive drop in food prices that are not included in core inflation.

Food prices that rose by 2.5 percent in March 2015 dropped 1.5 percent in March 2016. This is an exceptional situation.

The contribution of the fall in the food prices on yearly inflation was approximately 1 percent.

The yearly rise in food prices regressed from 8.8 percent to 4.6 percent.

The most important factor in the fall of food prices is the fact that domestic prices have dropped due to the downsizing in the Russian market. In addition, the regression in tourism due to the terror crisis has also contributed to the fall in food prices.


Foreign exchange situation 

Another important factor in the regression of inflation is the stop in the upward trend on foreign exchange currency.

Due to U.S. Federal Reserve’s moderate attitude on interest, capital inflows to countries like Turkey have started while rising trends in foreign currency have stopped.

The fact that the influence of the foreign exchange currency has diminished has played an important role in the drop in the inflation. Reversely, foreign exchange currency is also the most important factor, which has seen only a 0.2 percent drop in core inflation.

In sum, the tendency for foreign exchange currency to continue like that or go downward might lead to a drop in core inflation.

Yet, there is an expectation to see a rise in food prices for April or latest, May. A tendency by the Fed to increase interest rates by June might lead to an upward tendency in foreign exchange currency.

We have probably seen the lowest point in inflation this year; that or we will see it in April. But afterwards, it will again be difficult.