Inflation expectations growing worse

The first inflation data of 2014 has offered a pessimistic picture. While the increase in the consumer prices (CPI) for January was 1.72 percent, this figure was a bit higher than market expectations.

The main component that creates the pessimism regarding the January inflation data is the increase in producer prices (PPI). In January, while the increase in PPI was 3.32 percent, its annual rise has reached 10.72 percent. The conclusion to be drawn here is that producers’ costs have seriously increased but this increase has not yet been reflected on consumer prices. Consequently, when costs are reflected in the next term, then there is the risk that CPI will hit two digits.

One dimension of the risk of cost inflation is that it is an inflation type that the monetary policy tools of the Central Bank do not affect much. On the other hand, in the case that the domestic demand is not buoyant, then there is the possibility that producer prices will not entirely reflect on the consumer.

However, it is also obvious that because of the local elections to be held at the end of March, domestic demand will not be shrinking too much. More than that, we are face to face with the fact that at least one more year will pass as an election process. Hence, this time it looks inevitable that the increase in producer prices will be reflected on the consumer.

The most important contributing factor to the increase in CPI, which reached 7.48 percent at the end of January, has been the increase in food prices. While food prices increased 5.16 percent in January, transportation took second place. At this point, it is possible to say that the value loss of the Turkish Lira, in other words, the pressure of the increase in foreign exchange rates on inflation, is progressively increasing. The prices of gas, diesel and LPG, which have risen because of the exchange rate, have naturally started to show their selves in transportation prices.

Moreover, we should not forget that despite the increased exchange rates, no price hike has been introduced in natural gas prices; they are being subsidized for now. After the March elections, there will be gas and electricity price hikes to a great extent. In other words, the effect of the exchange rates on the inflation will continue to demonstrate itself increasingly. It should also be said that a portion of the rise in car prices has been reflected on inflation, but not entirely.

Monetary policy will not change

Another striking factor has been that the tax increases introduced on alcoholic drinks and cigarettes at new year have not yet been reflected on the inflation figures. In the coming term, this will be inevitable.
Topping the items that affect the inflation positively is the prices of textile and shoe products where discount campaigns are ongoing.

The high loss of value in the lira has also caused serious increases in the core indicators of inflation that is influential in the Central Bank’s monetary policy decisions.

Market actors think that the inflation data that came out higher than expected and that created pessimism for the future will not cause radical changes in the Central Bank’s current policy.

Even if it has to raise the interest rate, because of elections, we see that the Central Bank is keeping the money a bit loose and preventing domestic demand from shrinking sharply.

Actually, it needs to use the interest rate at 12 percent instead of the current 10 percent, but we will see how it will use it. We will have the opportunity to see whether or not inflation is fought with the inflation figures released during the year.