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

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.