Inflation as an equation with multiple variables

inflation-as-an-equation-with-multiple-variables-04052012

Inflation as an equation with multiple variables

Turkey’s consumer prices had increased 0.85% in April, while annual inflation was realized as 10.9%. While the forecast median of the economists participating in the Bloomberg survey was 0.6%, the forecast range was between 0.2% and 1.4%. For inflation equation, we see that negative and positive factors coexist. The main assumptions of the Central Bank in the 2nd Inflation Report of the year are that the downward pressure will weigh in the period after July and the factors that will decrease the inflation will dominate the upward effects. In this context, the bank has cut the year-end inflation expectation to 7.4%.

 

If we look at the sub-items of inflation; energy inflation decreased significantly from 9.8% to 3.3% compared to March due to low oil prices. On the food inflation side, which is the most determinant item, with the increasing demand effect, volatility in prices seems to have come. In this context, there is an increase of 2.53% in food inflation on a monthly basis. Annual food inflation is 13.1%. Core inflation, on the other hand, declined to 9.9% on an annual basis, indicating a more positive picture in terms of the trend of core goods and services and FX pass-through.

 

Despite that; it is necessary to see the final effects of factors that may pose an upside risk in inflation in the coming months. Most importantly, the depreciation of TRY and FX pass-through effect... The decrease in energy and commodity prices is an advantage for us in terms of cost effect and there is no demand effect that will create inflation in terms of stagnation in the economy. However, since our problem in inflation is related to the cost element rather than demand, it is necessary to pay attention to how the balance between commodity prices and TRY depreciation will be formed. TRY depreciation may neutralize the impact of energy and commodity price decline; because we are dependent on energy and raw materials, and foreign exchange-based prices are rising. It is necessary to monitor the effect of this especially on production costs in industry. Due to the protection measures, the supply-driven effect on the recovery speed of the production line may lead to a new balance point in prices. On the basic goods and services side; due to the closed restaurants, hotels and shops, and travel restrictions, because of the lockdown; the issue of how new prices will be formed during the opening period is also important.

 

We understand that, as per the guidance of the Central Bank in the Inflation Report, the Bank will continue to cut interest rates. Although low demand and commodity prices affect inflation downward, if the depreciation in TRY accelerates, inflation expectations may deteriorate and the base scenario may change.

Source: Tera Menkul
Hibya News Agency