THERE is a correlation, albeit not one-toone, between currency increases and price increases, particularly in producer prices. The change in producer prices is also reflected in consumer prices after a while, on a moderate scale.

It should be underlined that the reflection from producer prices to consumer prices is limited due to the “structure of the two indices, the fact that the same items are not covered and the weights are different in the same items.”

But what is certain is that exchange rateprice transitivity is an undeniable fact. This transitivity was not seen to a great extent last year. But first, let’s take a look at the rates for 2020. Last year, consumer prices rose 1.25% in December and 14.6% for the whole year. The last estimate of the Central Bank for the 2020 increase was 12.1% while it was 10.5% three months ago when the new economic program was announced. This indicates an almost 50% shift from the estimate at the end of September!

Domestic producer prices, on the other hand, increased by 2.36% in December and 25.15% for the whole year. The increases in both CPI and D-PPI in the last year were the highest annual increases after 2018. Of course, this applies to the new 2003-based index period. There are certainly periods which experienced much higher inflation in Turkey.

Although it varies from year to year, there is a clear parallel between the exchange rate increase and producer prices. I gathered the data of the last four years in a chart. In 2017, 2018 and 2019, the annual increase in the basket exchange rate and the annual increase in D-PPI were almost always at the same rate. Meanwhile, CPI tracks a more moderate curve.

My calculation is based on a currency market consisting of one dollar and one euro. Since prices show the monthly average, I calculate the change in the basket rate according to the December average. There was a 38.86% increase in the currency basket in the whole 2020. The increase in D-PPI, which had shown an increase in parallel with the increase in the currency basket in previous years, remained at the 25% level in 2020.

PRODUCERS CATCH UP TO CURRENCY INCREASE IN H2

There was a 39% increase in the currency basket and a 25% increase in the D-PPI throughout the year, indicating a 14-point difference. However, the increase was almost the same in the second half of the year. So, the difference in 2020 was actually revealed in H1. The currency basket increased by 17.5% in H2 2020 while the increase in D-PPI remained at 6.9%. In H2, although the rate increase continued at the same pace, the price increase gained speed. The currency basket increased by 18.2% and D-PPI increased by 17.1%.

WILL THE GAP BE CLOSED IN H1 2021?

Of course it will; producers will strive for this anyway. There are several ways to close this gap. First, the rate increase can stop after the slowdown, and even produce a return, as it did recently, so producers who go with moderate price increases try to eliminate the effects from H1. Second, the producer chooses to close the gap in a short time with high price hikes.

But is the second method possible? Would it be that easy? Demand is tied to the increase. However, we have entered a period in which “demand will be crushed where the head is seen” due to fight against inflation. Therefore, it will not be easy for producers to get rid of the currency burden. The biggest incentive for them at this stage is to keep the current exchange rate stable for a long time and to maintain the advantage of continuing to sell from the prices formed according to the high exchange rate (since a price decrease is not expected after the exchange rate decreases).

The currency-price relationship is a bit broken

The currency basket increased by approximately 39% and the D-PPI by 25% in 2020, indicating a shortage in currency-price transitivity. However, the gap occurred in the first half of the year; the exchange rate and price increase are almost the same in H2. As a result of practices aimed at curbing the increase in demand within the framework of the anti-inflation program, the reflection on the consumer from producer prices will likely not be too much.