CPI index value for the last twelve months is more than twelve times the headline indicator!

Yes, it is right: twelve times higher. Summation of the inflation targets for this year and the next year gives the figure twelve. Of course, in percentage ratio. The statement by the Central Bank reveal that the headline inflation indicator, which is the indicator taken into consideration particularly when making monetary policy decisions refer to the price raises as calculated via the 'l' index. This index excludes the prices of energy, food, tobacco and alcoholic beverages which are considered to be out of the scope of impact of the monetary policy.

TURKSTAT has been providing data on this issue since the beginning of 2003. In line with the nature of the said indices, average value of both the headline indicator and consumer price index (CPI) for the year 2003 is 100. Similarly, average for the year 2006 is almost the same. However, after 2006, the gap between the two indices widen: Over the last twelve months, average CPI index stood at 176.5 while headline inflation index stood at 157.9.

I am sorry to bother you with all the numbers. But I have to mention one last figure: CPI index value for the last twelve years is twelve percent higher than the headline inflation indicator! What does this mean? It means: The gap between the two indices is as large as the summation of the inflation targets for this year and the next year. On the other hand, if the 'l' index is the indicator of the headline inflation, the calculated inflation rate should eventually be representative of the consumer price index it is the basis of. The basket of goods on which the consumer inflation calculation is based includes alcoholic beverages. These are not included in the 'I' headline indicator. To put it differently, one is a bit drunk; the other is sober.

In that case, take a citizen who regarded neither the recent tax raises nor his health and overdrank. Assume that he/she also has a loyal dog. On the way back to home, he/she swings on the road. But the main direction headed is correct: towards the home. The dog, however, habitually keeps straight. So, on the road they get separated for some time and than get closer.

The relation between the consumer inflation and headline inflation should be exactly like this too. They should be together even when they drift apart. But this is not the case in our example. And under these circumstances, it is wise that the Central Bank thinks thorough the headline inflation indicator to which it frequently refers when making decisions about monetary policy. Is this simply a problem resulting from the alteration of the headline inflation indicator? Or are we at the edge of a more critical problem? Or is it showing reaction on the basis of headline inflation that is a problem for developing countries?

And a note: According to the data announced today, in October CPI inflation and headline inflation stood at 8.6 and 2.5 percent, respectively. Watch the difference: half of twelve!

This commentary was published in Radikal daily on 04.11.2010