During 2011, the difference became close to zero. In the last couple of months, however, the two indicators started to differentiate again.

I will make a brief assessment of the latest credit supply and inflation figures. Consumer price index increased more than expected in August with the impact of the significant rise in food prices. Hence, annual consumer inflation reached 6.7%. The annual increase in the l index that the Central Bank (CBT) pays special attention to maintained the upwards trend in previous months and arrived at to 6.2%. This was in line with the CBT's expectations as was clearly declared in previous remarks.

I have not made any assessment on inflation rate lately. In my previous assessments, I stressed a point that I attach special importance to. Headline inflation, regardless of whether it is measured with the l index or the H index, has been diverging considerably from the consumer inflation since the beginning of 2006. Annual consumer inflation has always been reaching above the annual headline inflation. If these indices actually measure the "headline" inflation, their difference from the consumer inflation must be negative at some periods and positive at others, giving an average difference for the periods beginning with 2006 close to zero. But this is not the case for us. This naturally makes you question to what extent the H and l indices were successful in measuring the headline inflation.

During 2011, the difference became close to zero. In the last couple of months, however, the two indicators started to differentiate again. What is more, since 2006, there were other periods which the gap closed down but the trend was not sustainable in any of them (Figure 1). Therefore, the question still holds: Do the present headline inflation indices successfully measure headline inflation?

There is nothing new when it comes to credit supply. According to the data provided by the Banking Regulation and Supervision Agency, Lira denominated credits and foreign exchange (in dollar terms) credits increased by 20.4 percent and 18.7 percent in the last eight weeks, compared to the average for the last eight weeks of 2010. The ratios stand at 33.8 percent and 34.3 percent respectively compared to the same period in the year before. These figures reveal that measures initiated to limit the growth of credit supply did not give the desired outcomes. Let's wait and see whether the ongoing tension in global markets that started in August will automatically limit the pace of increase.

Figure 1. Annual consumer inflation and annual headline inflation (I index) 2006 January-2011 August (%)

Source: TURKSTAT

This commentary was published in Radikal daily on 06.09.2011