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    A new perspective on inflation

    Fatih Özatay, PhD04 April 2013 - Okunma Sayısı: 1133

    Global competitiveness cannot be improved simply by intentionally pushing up exchange rate. The concomitant inflation hikes offset the competitiveness effect.

    The rain of data is continuing. Yesterday inflation data for March was released. Actually, we were mainly focused on the growth figures, since growth rates have been in decline since the first quarter of 2011. We have been trying to answer when the downturn in growth will end, whether the recovery process has begun and if the 4 percent growth target is achievable. But inflation dynamics should never be neglected. The authorities that have to take inflation seriously might push the issue to the background or give this impression with their decisions and remarks. At least we, columnists, keep the issue on our radar.

    Inflation rigidity

    First, a summary of the highlights from inflation figures for March: annual consumer price index (CPI) inflation increased to 7.3 percent from 7 percent in February. The inflation rate was close to this level also in January. The rigidity in annual inflation is ongoing since the beginning of the year. Headline inflation figures also are rigid for the last four months. The l index to which the Central Bank (CB) attaches special importance was 5.8 percent at the end of 2012. The rates in 2013 were 5.7 in January and 5.8 in both February and March. The index excludes the prices of energy, food, tobacco, alcoholic beverages and gold from the basket. The Bank occasionally uses the H index which excludes alcoholic beverages, tobacco and gold. The H index increased 6.5 percent at the end of 2012 and has been floating around 6.3 percent since January. All these figures point at an inflation rigidity. I hope that the rigidity goes down soon.

    Now, I will switch to the “negligence” part. Below is the updated version of a table I previously presented.  There is one graph the CB uses in reports and presentations for some time now. For instance, it was the first graph of the inflation report for 2012-quarter 1. It compares the value of the lira with ten emerging market currencies since November 2010. In this light, the CB emphasizes that the monetary policy in effect both lowered the volatility of the value of the Lira and limited the appreciation of the Lira against emerging market currencies.

    The table below shows CPI inflation figures for Turkey and ten emerging market economies. The rates represent the percentage increase in CPI in February 2013 in comparison to the CPI average in 2010. The data for Columbia are retrieved from the Central Bank of Colombia, and others are from the OECD database. The message is as clear as day: CPI inflation is no joking matter. Global competitiveness cannot be improved simply by intentionally pushing up exchange rate. The concomitant inflation hikes offset the competitiveness effect.


    And a correction: In the “advertorial” section of my latest commentary, I said, “when GDP figures for the first quarter was released, I estimated year-end GDP growth at the 2.2-2.3 percent interval.” I actually meant “when GDP figures for the first three quarters were released.”

    This commentary was published in Radikal daily on 04.04.2013