Despite strong expectations that inflation would soar in June on the back of the declining value of the Turkish lira and the tumbling Istanbul Stock Exchange (IMKB), recently-released June figures revealed a lower than anticipated increase in the consumer price index (CPI).
According to the Turkish Statistics Institute (TUIK), June CPI rose 0.34% month-on-month, bringing the total increase since December 2005 to 4.88% and the year-on-year increase to 10.12%. Analysts had been anticipating a much more significant rise, with a recent Reuters poll pegging the median expected increase at 1.5%.
The change in CPI was led by strong monthly increases in costs associated with transportation (up 3.77%), recreation and culture (up 2.52%), and housing (up 2.18%), with costs rising quickest - up 1.37% in the statistical region encompassing Bursa, Eskisehir and Bilecik, according to the Eurostat, the statistical office of the European Commission. Contrary to expectations (and, perhaps, local popular perceptions), retail prices in Istanbul, Turkey's largest city, actually went down - in part due to the early onset of sales in the retail apparel sector.
More troubling, however, was the rise in the producer price index (PPI) for June, which came in significantly above expectations at 4.02% month-on-month, according to TUIK. PPI is up 11.68% since December 2005 and 12.52% year-on-year. The PPI increases were led by the significant month-on-month hikes in the basic metals industry (up 13.32%), coke and refined petroleum products (up 13.26%), and metallic minerals (up 10.21%).
In talking to reporters, Turkish Union of Chambers and Commodity Exchanges (TOBB) Chairman Rifat Hisarciklioglu explained his take on the June numbers. "The rise in PPI is a reflection of the rise in foreign exchange rates. The normalisation of the PPI rise will be possible through the stabilisation of foreign exchange rates. I believe we will witness a decline in 2007," he said.
Hisarciklioglu went on to add that the sharp rise in PPI but not in CPI points to a larger problem for Turkish producers.
"The meagre rise in CPI is clear and concrete evidence of the fact that although production costs soar, we are not able to project that upon prices. That is a tangible indicator of shrinking domestic demand. As domestic demand shrinks, that very difficulty will prevail at an increasing rate. Companies producing for the export market have good prospects. But we could say that companies serving the domestic market are having trouble as they are not able to project the costs into their prices," he said.
The Turkish lira has been hard hit over the past two months, falling some 17.87% from April 1 to July 6. Though this is bad enough, the figure actually represents a significant recovery from late June, when the lira was down even more sharply, hitting rock bottom on June 26, down 26.9%. The central bank played a significant role in helping along the recovery, hiking interest rates by 175 base points (1.75%) at a special session of the Monetary Policy Committee (PPK) on June 7 and holding daily auctions to buy lira with the bank's dollar reserves. While these steps have certainly helped to halt the fall, they have not reversed it and, as Hisarciklioglu pointed out, they are largely factored into current foreign exchange rate levels.
The Turkish Central Bank noted in its monthly Price Development Report released on July 4 that foreign exchange rate rises against the Turkish lira raised the June inflation figures by an estimated 0.87%. The central bank has indicated that rising foreign exchange rates are likely to continue having an impact on inflation figures in July, although the effect should be somewhat lessened. "It is estimated that the direct impact of the dollar strengthening will continue but lessen during July", the bank noted in its monthly report.
The bank also went on to add that rises in the cost of coke and refined oil products will continue to drive increases in PPI. "Based on data from the start of July, high rises are anticipated for prices of coke and refined petroleum products," it said.
With the June numbers bringing year-to-date CPI to 4.88%, it looks as though the government's official year-end target of 5% inflation will be difficult to meet. So far, however, the government has not changed the target, and is also holding firm to its 4% target for the end of 2007.
While some factors causing inflationary pressures on the Turkish economy are out of the government and central bank's control, such as rising prices for oil and imported industrial raw materials, others, like the impact of the foreign exchange rate on inflation, can be influenced by fiscal policy.
Things look to be on an upward trajectory for the moment, but Turkey's bankers may soon need to take more drastic action to curb the threat of rising inflation. No one wants a return to the bad old days.
