The rise in inflation is expected to continue for a few more months By

© Reuters – The CBRT report, which published the summary of the meeting on January 21, pointed out that the annual inflation may go up for a few more months due to supply-side inflationary factors that are highly effective in the short term.

The highlights in the PPK summary are as follows:

  • Annual processed and unprocessed food inflations were 15.52 percent and 26.34 percent, respectively. Seasonally adjusted fresh fruit and vegetable prices increased by around 10 percent cumulatively in November and December. Sharp increases in international prices and cumulative exchange rate effects were determinant. The strong upward trend in the prices of eggs, white meat, rice and pulses, which are among the basic food products, continued. While bread and cereals continued to rise in processed food prices, the sharp increases in fats and oils continued. The cumulative increase in the last four months in the fat and oil group exceeded 20 percent. High frequency data indicate that the increase in the raw milk reference price is reflected in a wide range of related food products.
  • Prices in the energy group increased by 1.47 percent in December, and annual inflation rose to 5.64 percent. The main driver of this increase is 3.5 percent due to the increase in international oil prices. increasing fuel prices has been. Despite the appreciation in the Turkish lira in January, with the higher rate of increase in crude oil prices and the increases in administered prices, group inflation is expected to continue to rise.
  • Core goods prices increased by 1.42 percent in December, and the group’s annual inflation rose by 1.92 points to 17.24 percent. Cost pressures due to delayed exchange rate effects and the upward trend in international metal prices and aggregate demand conditions support the strong upward trend in durable goods prices. While the rapid increases in durable goods prices spread to sub-items, the group’s annual inflation reached 30.40 percent. The gradual rise in inflation of other core goods continued with a lagged exchange rate pass-through. Weak demand conditions in clothing and footwear caused prices to fall below the level of the previous year. The Committee evaluated the effects of the epidemic-induced divergence in sectoral demand conditions on inflation and pointed out the upside risks to the clothing group from tourism in the upcoming periodr.
  • Crude oil prices increased strongly following the previous MPC period. In addition, the ongoing upward trend in non-energy commodity prices, particularly in agricultural products and industrial metals, adversely affects producer and consumer inflation. Inflation in the paper and base metal sectors, which are the main input providers in the manufacturing industry, is quite high. With the extension of lead times in these and related sectors, supply constraints have become more pronounced. Other items that stand out in the high course of producer inflation are vegetable oils, animal feed, vehicle and electronic products. These items have an impact on consumer inflation through food and durable goods. The Committee pointed out that despite the appreciation in the Turkish lira, commodity prices played an important role in the continuation of inflationary pressures. drew attention to the upside risks.
  • Domestic demand, which was strengthened by the cumulative effects of high loan growth during the epidemic period, on the current account balance its negative effect continues. Despite the slowdown in economic activity, especially in European countries, due to the recent increase in the number of cases, the fact that the epidemic restrictions do not cover manufacturing industry activity supports the export outlook. While there is a partial slowdown in import demand, gold imports maintain their course above historical averages. While evaluating the effects of the dollarization tendency of residents on the external balance, the Committee discussed the dynamics of gold trade.
  • Domestic demand conditions, cumulative cost effects, particularly the exchange rate, the rise in international food and other commodity prices, and high levels of inflation expectations continue to adversely affect pricing behavior and inflation outlook. It is expected that the slowing effects of the strong monetary tightening realized at the November and December MPC meetings on loans and domestic demand will become more pronounced. Thus, demand and cost factors that affect inflation are expected to gradually weaken.
  • On the other hand, developments in international commodity prices, increased supply constraints in some sectors, and price and administered price adjustments maintain their importance on the medium-term inflation outlook. Although the lagged effects of the slowdown in credits are expected to become evident in the upcoming period, it is considered that annual inflation may go up for a few more months due to supply-side inflationary factors that are quite effective in the short term. The additional inflation stiffness created by the minimum wage, especially through service prices, requires the tight stance in monetary policy to be maintained for a longer period compared to previous predictions. Tight monetary stance; It will act as an important buffer against external and temporary volatility in the context of inflation expectations, pricing behavior and financial market developments.
  • Accordingly, the Committee, taking into account the 2021 year-end forecast target, resolutely to adopt the tight monetary policy stance until strong indicators are formed that point to a permanent decrease in inflation and price stability. it has decided to continue for a long time. Within the scope of strong indicators that point to a permanent decline in inflation and price stability, the underlying trend of inflation and indicators of pricing behavior, diffusion indices, demand and cost factors and inflation expectations will be closely monitored with the targets within the forecast horizon. If necessary, additional monetary tightening will be made. Additional tightening is based on the medium-term target path in inflation expectations and pricing behavior of any new data to be obtained, as well as existing data. in case of a risk of deviation will be made.

Author: Necdet Erginsoy

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