Turkish Inflation: Tomaaato, Pepper, Eggplant
My attempts at catching up are continuing, so below is my Hurriyet Daily News column from two weeks ago, which you can also read at the Daily News website.
I have a couple of additional comments, so there will be an an addendum soon, but a couple of words on Baris Manco, to whom I am paying homage to in the title, are in order. If you are Turkish, or lived in Turkey for a while, you already know him and his music, and for those who don’t, I hyperlinked the Wikipedia entry in the column. In fact, he has several songs that are humorous like the one that inspired the title such as Ayi (Bear, Turks use to word to refer to a coarse guy- British expressions lager lout and chav and American redneck are the closest, but you would have to live in Turkey to know what he really means, to sum up, spitting on the street and reckless driving are two common traits) and Arkadasim Esek (My friend the donkey, with a double meaning, i.e. that he is friends with a donkey and that his friend is not loyal)…
Anyway, I am digressing too much, so on to the column, but not before I say RIP Baris Manco…
Yep, we do miss you a lot:(…
When the November inflation figures came out, I imagined Central Bank Governor Erdem Başçı singing the Barış Manço classic “tomato, pepper, eggplant”.
Rising 66.9 in a month, eggplant was November’s inflation champion, followed by tomato at 48.0 percent. Charleston pepper came in fourth, trailing behind cauliflower. Food prices increased 3.3 percent, contributing significantly to the monthly figure of 1.7 percent. As this number was significantly higher than last November’s, yearly inflation jumped sharply to 9.5 from 7.7 percent.
This wasn’t a big surprise, as the Central Bank had warned of a rise in unprocessed food prices, and the Bank blamed it as well as the larger than expected lira depreciation for the increase in inflation. The latter can be seen in the jump in core inflation, which excludes food inflation as well as the recent energy and tobacco administrative price hikes.
Since last December’s inflation was -0.3 percent, we are likely to end the year with a double-digit yearly figure. How about next year? “To convince us that inflation will be falling”, Başçı recently argued that while the policy rate is expansionary, fiscal policy is neutral and both financial sector and liquidity policies are contractionary, making the net policy stance contractionary.
No one believes yearly inflation will be near double-digit territory at the end of next year. If nothing else, “higher inflation this year means lower inflation next year”, as Başçı was “explaining” at the monthly meeting with bank economists last week. But the key question is how far it will fall, and in this respect, Başçı’s arguments do not answer whether the overall policy stance is tight enough for inflation to reach the 5 percent target.
In fact, if you read in between the lines of the Bank’s recent documents, you get a sense that the Bank is well aware of the challenging inflationary outlook. The Bank’s main scenario assumes the continuation of the current monetary policy stance, no further lira depreciation, considerable slowdown in economic activity, limited pricing power by firms that would restrain the second-round effects of an exchange rate pass-through, tame energy and food prices and no major increase in taxes.
Growth is set to decelerate significantly next year, mainly because of Eurozone woes, but believing all these conditions will materialize requires “Pollyannaesque” optimism. For example, the government is projecting an increase of 11.5 percent in tax revenues on the back of 4 percent growth for next year. When it becomes apparent this goal will not be reached because of lower growth, it will be interesting to see whether the government will resort to additional taxes.
More realistically, we should be happy if inflation ends the year near 6.7 percent, the upper end of the Bank’s end-2012 inflation forecast. For one thing, sticky expectations and the persistence of structural inflation paint a difficult picture. Besides, global commodity prices have been favorable this year, but a negative shock can’t be ruled out next year.
Once all my concerns are addressed, I will be a true believer in the Central Bank. Until then, I remain a skeptic.
One Response to “Turkish Inflation: Tomaaato, Pepper, Eggplant”
Masala of India • April 17th, 2012 at 7:37 pm
Once all my concerns are addressed, I will be a true believer in the Central Bank. Until then, I remain a skepti
