Negative effect of normalization with Russia on inflation

Negative effect of normalization with Russia on inflation

Inflation, which has followed a low course in recent months, started climbing again in June. Inflation is expected to climb further because the normalization process with Russia will have an increasing effect on inflation even as it makes a huge contribution to the economy. However, due to its huge contribution to the economy, the negative effect on inflation will be accepted as a bearable consequence. 

While the annual consumer price increase fell to 6.58 percent at the end of May, the annual inflation went up to 7.64 percent last month. The biggest contribution to this was food prices. With the effect of the halt of food exports to Russia, food prices have been low in recent months. There has been a correction, in a sense, and food prices increased at a rate of 1.2 percent in June, corresponding to the annual rate from 1.8 to 6.3 percent. The base effect has been huge in this high rate of increase. 

Both the opening of trade with Russia, the base effect and the developments in energy prices are expected to increase food inflation in the coming months and, correspondingly, the headline inflation rates. 

The end of restrictions on Russian tourists to Turkey has been a pleasing development for the entire business world, particularly the tourism sector. However, the recovery in tourism is expected to affect the low course in food prices; in other words, with the opening of the tourism season and the increase in demand, food prices are expected to rise. 

However, the real effect on the inflation of the normalization with Russia and the recovery in tourism will be seen in an increase in hotel and restaurant prices.  

With food inflation increasing more than expected in June, an expected drop in core inflation, which is the most influential indicator in Central Bank’s rate decisions, did not occur. When details of the core inflation are reviewed, it can be seen that the prices of furniture, education, communications and health services had an increasing effect in this index. On the other hand, the prices of hotels and restaurants, entertainment and cultural services had a decreasing effect on core inflation. 

The prices in this latter group are expected to increase with the normalization of relations with Russia and the recovery in tourism. In short, the normalization with Russia is expected to raise both the food and the core inflation and thus the headline inflation. 

Annual inflation of 8.5 percent 

There is a general opinion in the markets that the 6.58 percent inflation level reached at the end of May was the lowest. The dominant expectation is that inflation will not fall for the rest of the year. 

Market analysts say the exchange rate levels are low, meaning that from now on, there will not be any positive contributions to inflation because of the exchange rate; on the contrary, there will be increasing effects in the coming term. Also, the rise in energy prices is expected to increase inflation, just like food prices. 

According to market analysts, the end-of-year inflation rate is expected to be around 8.5 percent.