Introducing the inflation lobby

As I was leaving Ankara to work in Istanbul as a market economist back in 2006, ex-Central Bank Governor Süreyya Serdengeçti invited me to his office for a farewell chat.

It turned out he also wanted to give advice to this budding young economist, as sort of a parting present. That conversation turned out to be probably the single most useful hour of my career as an economist.

The ex-Governor spent a lot of time explaining to me the “inflation lobby”, about which he has spoken publicly as well. I have always been skeptical of conspiracy theories, so I remember taking his words lightly at the time. It took me several years to understand what he really meant.

As in any good mystery, the key questions are “who” and “why”. But before answering those, it is useful to sum up the latest inflation developments. September inflation, which was released last Monday, came in at 0.75 percent for the month, broadly in line with expectations.
The drop in yearly inflation from 6.65 percent in August to 6.15 in September is misleading, as it reflects the sharp fall in food inflation compared to a year earlier. The rest of Monday’s data is not encouraging, as both non-food and producer prices are increasing in yearly terms.
The latter reflects the sharp lira depreciation, which is already starting to be felt in consumer prices. Core inflation, which excludes items responsive to temporary shocks but not to monetary policy, has surpassed headline inflation for the first time since the summer of 2005. It has increased 1.53 percentage points in the past two months alone.

Interestingly enough, the Central Bank now accepts that there will be some pass-through to inflation. In Thursday’s meeting with bank economists, the Bank noted that its H index would hit 8 percent this quarter.

That makes sense. Otherwise, I would have wondered why they have depleted $4 billion of reserves to defend the lira since August, including more than a billion bucks in the last few days alone.

Unfortunately, the Bank continues to downplay inflation. In the same meeting, the Bank stated it expects core inflation to retreat in 2012. The rationale is that “recent data releases suggest that there will be a notable slowdown in economic growth in the second half of the year.”

We are more than halfway through the second half, and I honestly have no clue to which indicators the Bank is referring. On the contrary, the purchasing managers index, capacity utilization rate and real sector confidence were all strong in September.

But this is hardly surprising. Inflation has been playing second fiddle to the current account deficit and growth for the Central Bank for quite a while. But they would never admit to that, as it would hurt their credibility and inflation-fighting credentials.

It has taken me some time to get there, but now I can talk about the inflation lobby. It is much easier to answer the who than why. Just look for the people who are talking about the high-interest lobby, a fictional alliance supposedly led by foreign financiers trying to suck Turkey dry.

I will turn to the second part of the mystery, namely what makes the inflation lobby tick, in my blog

But this is hardly surprising. Inflation has been playing second fiddle to the current account deficit and growth for the Central Bank for quite a while. But they would never admit to that, as it would hurt their credibility and inflation-fighting credentials.

It has taken me some time to get there, but now I can talk about the inflation lobby. It is much easier to answer the who than why. Just look for the people who are talking about the high-interest lobby, a fictional alliance supposedly led by foreign financiers trying to suck Turkey dry.

I will turn to the second part of the mystery, namely what makes the inflation lobby tick, in my blog.