The September inflation rate announced by the Istanbul Chamber of Commerce at the beginning of the month and by the Turkish Statistical Institute on October 3rd seems to have frightened the markets. The monthly inflation announced by the Turkish Statistical Institute as 4.97 percent is seen as 49.4 percent on an annual basis. Does this situation, which has come true contrary to other expectations as well as the decline in global energy prices, mean the failure of the Stability Program implemented since June 2023?
The stirrings
September is generally the month when activity increases slightly each year and monthly inflation is higher than other months. September is a month when education prices are renewed and annual increases are made, and it is a month when important decisions are made after people's comfortable summer agenda.
There are also a few signs that counter the decline in inflation. We see that the rise in housing and second-hand car prices is accelerating, consumer confidence is recovering (which means that demand is falling and thus contributing to disinflation), credit card spending is increasing, and consumer goods imports are still positive despite the monetary policy measures taken. The fact that imports of consumer goods in particular are still higher than exports means that the policy rate, which is quite high (50%), has not been successful in this area.
When looking at the main components of inflation, it is noticeable that producer prices have increased by 33 percent, but service inflation remains high. In particular, education and housing prices exceeding 90 percent are a situation that will negatively affect inflation.
Important Component: Rents
The fact that rents, which are important components of the CPI, have increased by 117 percent on an annual basis is a factor that increases concerns. While this may be due to the delay reflected in the TÜİK data due to the removal of the 25 percent increase limit, September, when there is a lot of intercity mobility, may also have its own effect. It can be said that in addition to households moving for their children's schools, university students have an increasing effect on rents. This can therefore be expected to decrease in the coming months.
Expectations
The household and real sector (market participants) surveys published by the Central Bank of the Republic of Turkey show that inflation is still expected to be high for 12 months. While market participants outside of households and the real sector expect inflation to be around 28 percent after 12 months, the real sector expects it to be slightly above 50 percent and households expect it to be slightly above 70 percent, indicating that although there is a downward trend, expectations are still far from the target. The fact that households have high expectations of 70 percent also shows that their desire to bring their spending forward is still high.
Main Trend in Inflation
One of the methods used to reduce inflation is the TCMB's "guidance policy." This policy consists of the central bank making inflation estimates for the upcoming period and taking steps for them. The TCMB expected the main trend in inflation to be an average of 2.5 percent for the third quarter of this year and 1.5 percent for the fourth quarter. This increase in September also makes it difficult for the expected main trend to occur. The main trend in inflation in the third quarter did not occur as expected, and the fourth quarter estimate has also been jeopardized. The realization of the next quarter estimate would play an important anchor role in the realization of the 16 percent inflation expectation for next year.
Is the Stabilization Program in Danger?
The answer to the question of whether the government's program has been successful varies depending on who is asked. While the government presents a narrative that inflation has been on a downward trend, market commentators believe that the problem will worsen if the program, which will last more than two years, fails to bring inflation down to a satisfactory level (below 20 percent).
The contraction in the manufacturing sector may be one of the topics that worries the government. The manufacturing sector is showing significant signs of cooling. In addition to low domestic demand, low demand in the US and the EU is a factor that reduces exports and therefore causes production to be cut. For this reason, although the government is investing more in the soft landing scenario, the story of falling inflation has been sold to financial circles abroad rather than being established as a consensus in the country.
The fact that the growth data in the Medium Term Program is higher than the expectations of the Central Bank and general financial circles shows that the economic management is hesitant to slow down the economy. A possible recession in Turkey is a situation that could have negative consequences for both the government and society. Although the soft landing scenario is a very reasonable scenario for a government, the ongoing heterodox policies in Turkey cause the policies implemented now to be inadequate.
Conclusion
Measures that will structurally reduce inflation in the economy are not wanted by the public, producers and the government. It is said that the package that was considered as a new tax package and that foresaw more taxes being collected from high-income groups has been shelved.
On the other hand, the government is not taking steps to improve income distribution because it is thought that they could both increase social unrest and be very costly. The amendment to the law on those who are stuck in retirement age, which was enacted before the elections, was cancelled because it created a big hole in the public budget, and it also prevented other steps that would have a positive effect on income distribution.
The program is unsuccessful because some believe that it will not be able to reduce inflation to the 39 percent that the CBRT predicted at the beginning of the year, while it is successful because the momentum of inflation has shifted to a downward trend. In order to reach the 39 percent year-end inflation forecast that the CBRT determined as 39 percent, the main trend in the fourth quarter needs to fall to 1.5 percent. The movement in September inflation and the insufficient decline in domestic demand make the path to 39 percent difficult. Although the CBRT keeps the range of its 39 percent forecast at 3 points up and down, reaching 42 percent still seems uncertain.
I tried to give you as much information as possible about the topics that will be discussed about the economy in the next three months. If you liked my article, you can like it below, and if you have any criticisms, you can write a comment.
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