THE GRAPH SAYS: “Prices are increasing as foreign exchange rates increase”

Monthly price increases continued in September 2020…

Turkish Statistical Institute released domestic producer and consumer prices inflation figures of September. Domestic producer price index (D-PPI) increased by 2.65% compared to the previous month while consumer price index (CPI) increased by %0,97 m/m. USDTRY gained momentum by 3.51% in the same period.

In the graph above comprising the 2018-2020 period, the left axis shows monthly changes of both D-PPI and CPI while right axis the course in USDTRY.

If you pay attention to the graph above;

. The rise in the USDTRY (green line) has been increasing the costs of the producers (blue bars), and producers are able to reflect the cost burden to the output prices (red bars) to a lower extent.

. In the periods of decreasing or stable USDTRY, costs of the producers have been diminishing but output prices continue to increase.

What affects price increases?

The graph above proves that depreciation in Turkish lira (TRY) increases the input costs, and such increases are reflected to the output prices.

So, is the depreciation in TL the only reason for the increases in output prices?

Of course not. Let me explain in an example:

Why did the consumer prices continue to increase while producer prices have been decreasing in July-August 2020? The reasons are the government’s price and tax hikes following general elections on June 23rd, 2019.

What can be expected on the inflation front in the long view?

It totally depends on uncertainties: Kovid-19, US elections, the course of TRY, budget originated price changes (tax and price hikes), geopolitical developments, actions from the Central Bank, early election risk. The list can be extended. In short, everything depends on the confidence environment yet not promising.

Dr. Fulya Gürbüz

Next week’s agenda: Confidence indices, capacity utilization, Fed’s policy rate decision, inflation report, foreign trade, and tourism

July 27, 2020, Monday

July manufacturing sector capacity utilization rate (CUR), real sector confidence index (RSCI) and sectoral confidence indices will be released. Following easing of COVID-19-led-closures in May, all these macro-economic indicators started to rise in May and got momentum further in June. A hint regarding July figures came with the IHS Markit PMI flash figures of Turkey’s main trade partner Eurozone. Flash Eurozone manufacturing PMI figures rose by 3,7 points to 51,1 in July compared to previous month. Figures above 50 indicate growth in the sector.  From the perspective of the supply chain, this may be a sign for a possible improvement in Turkey industrial production in July.  We will focus on relevant hints in CUR and RSCI figures to be released on Monday. Sectoral confidence indices, on the other hand, will help us understand the course of domestic demand.

July 29, 2020, Wednesday

Fed will release its policy rate decision. The target rate, which is the policy rate, is at the range of 0-0.25 percent since March 15, the date coronavirus declared pandemic. Fed is expected to hold the policy rate unchanged in July FMOC meeting. There are two developments supporting this expectation. Firstly, the Beige Book published on July 15, pointed to improvement in economic activity with a lower performance compared to the period before Covid-19, lower wages despite decrease in unemployment, and roughly flat input and selling prices. Secondly, the latest speech made by Fed governors in July belongs to Lael Brainard. Brainard stated that downside risks are maintained, the second wave of COVID-19 would further increase uncertainties, and financial and monetary support remain important. Lastly, Fed expanded loan facilities in July to revive economic activity and maintain financial support.

Central Bank of Turkey (CBT) will release second quarter Inflation Report. CBT decreased its inflation projection for the end of 2020 from 8.2% to 7.4% and kept its inflation projections for both 2021 and medium term at 5.4% and 5% respectively in its first quarter Inflation Report. Furthermore, CBT hold its policy rate at 8.25% at monetary policy committee meeting on July 23, stressing on upward risks regarding its year end inflation projections (pandemic-related rise in unit costs leading to an increase in the trends of core inflation indicators, and food inflation). We will focus on inflation and economic projections of CBT in 2Q20 Inflation Report. 

SAMEKS (purchasing managers indices) figures for July will be released. SAMEKS is one of the main indicators showing the tendency in both industrial and services sectors. SAMEKS Composite Index rose by 3.5 points m/m to 49.3, SAMEKS Services Sector Index rose by 2.1 points m/m to 46.3, and SAMEKS Industrial Sector Index rose by 7.0 points m/m to 56.7 in June. Levels above 50 points to growth in the sector compared to the previous month.

Tourism figures for June will be released. The sector has been contracting since March 2020 when Covid-19 burst.

Foreign trade figures of June will be released. Both exports and imports increased by 12% and 13% m/m respectively in May. According to Turkish Exporters Assembly (TİM) exports rose by 35% m/m to 13,5 billion dollars in June. Furthermore, according to central government budget figures of June pointed out a robust growth in gold excluded import figures.

July 30, 2020, Thursday

Economic Confidence Index for July to be released. The index rose by 11.8 points m/m to 73.5 in June. Being one of the parameters of Economic Confidence Index, TUİK Consumer Confidence Index fell by 1.8 points to 61.0 in July. In calculation of the Economic Confidence Index, the following parameters are considered: Consumer Confidence Index, Real Sector Confidence Index, and Sectoral (Services Sector, Retail Trade Sector, and Construction Sector) Confidence Indices. Historically, the Economic Confidence Index has a high correlation with the Services Sector Confidence Index and moves in parallel with both the Real Sector Confidence Index and the Retail Trade Sector Confidence Index. Therefore, the confidence indices to be released on Monday will help us to understand the course of the Economic Confidence Index in July.

Fulya Gürbüz, Ph.D.

Main factor in price increases is the depreciation of the Turkish lira

Turkish Statistical Institute released consumer (CPI) and domestic producer price (D-PPI) indices of May 2020. As can be seen in the graph above, monthly changes of both inflation figures have been rising continuously since December 2019.

CPI (2003=100) increased by 1.36% on monthly basis on the previous month by 1.36%, on December of the previous year by 4.57%, on same month of the previous year by 11.39% and on the twelve months moving averages basis by 12.10% in May 2020.

D-PPI (2003=100) increased by 1.54% on monthly basis, increased by 6.15% on December of the previous year basis, increased by 5.53% on same month of the previous year basis and increased by 9.14% on the twelve months moving averages basis in May 2020.

However, the year on year changes in both indices look more moderate:

If you pay attention to the graph above, I try to explain the year-on-year changes of inflation figures with the changes of USD/TRY. Why do I do that?

Because Turkey’s production mechanism depends mainly on intermediate goods imports, and payments are made in foreign currencies which are mainly in US dollars and Euro. Therefore, the price rise of imported goods in terms of Turkish lira is the most important factor affecting production costs and thus output prices.

As can be seen in the graph below, another important factor that causes price increases is the increase in taxes on goods.

Fulya Gürbüz, Ph.D.