Inflation at double-digits in Turkey

The inflation data in August clearly proved that inflation is not solely caused by food, as we reached the highest core inflation rate in the last 12 years at 10.2 percent. Indeed, this core inflation rate has occurred in a year when the official inflation target is 8 percent.

The core inflation rate is measured by taking consumer prices into account while leaving out the prices of energy, food, alcohol, tobacco and gold. Through this method, the general inflation rate and the main trend in prices is sought to be observed without the fluctuations in energy and food prices.

In accordance with this definition, we have observed the highest monthly increase of the last 10 years in August and reached the highest core inflation of the last 12 years. 

Also striking is the reemergence of a high increase trend in the producer price index (PPI). Producer prices had softened after peaking with the increase in exchange rates in the manufacturing industry in April. The increase recommenced in July and continued in August, when the yearly increase was 17.94 percent. 

Furthermore, the increase in the prices of intermediate goods in production inputs, at 21.7 percent, also approached the all-time record of April’s 22.1 percent increase. And while the price increases in production and intermediate goods are once again rising fast, it does not seem likely for consumer prices to fall. The record in core inflation is also a sign of this. Despite the fall in exchange rates, the monthly increase in the prices of intermediate goods - exceeding 1 percent in both July and August - does not bode well. The producer is going to pass this price increase onto the retailer.

The number of consumer price sub-indices rising at a rate of double-digits has reached 80 out of the total 134, (up from 46 last year). Although there has been a 3.3 per mille fall in food prices, 59 of the 113 food products’ price indices have risen this year (whereas the prices of only 49 products rose last year), according to the Turkish Statistical Institute. This landscape signals the persistency of pressure on food prices and double-digit inflation.

The issue seems to be coming full circle. Last month I wrote about how things were getting complicated in inflation, saying the Central Bank would have to increase interest rates. My conviction grew stronger with the inauspicious data for August, which is otherwise generally considered to be the calmest month in terms of inflation.

The Central Bank’s monetary policy of keeping interest rates high “temporarily” has also failed. It not only now has no possibility of decreasing interest rates; it is actually facing the risk of increasing the interest rate toward 15 percent.

The Central Bank must stop blaming inflation on the rise in food prices. It must seriously evaluate the phenomenon, otherwise it will be too late when the 15-20 percent rise in PPI transforms into a 15 percent rise in the consumer price index (CPI).

Those in Ankara should remember the famous quote of Josiah Stamp: “It is easy to dodge our responsibilities, but we cannot dodge the consequences of dodging our responsibilities.”