August CPI may have a bad surprise in store

From 2003 to 2020, a total of 18 years. During this period, the consumer price index (CPI) increased above 1% once in August 2018. That increase was 2.30%. The reason for it is quite simple, the infamous priest crisis. The dollar gaining 21% against the lira in August and allowing the exchange rate to skyrocket not to increase the interest rates caused this mess.

Increases below 1% were seen in CPI in12 out of the rest of 17 years and prices have declined in the last five years.

Let’s also underline the average change. The average August CPI increase in the last 18 years stood at 0.40%. Let’s take an average without the 2.30% rise in August 2018 and the 0.44% decline in August 2006, then it would be 0.33%.

If we were to take an annual base value, the 2020 increase would be 0.86%. That’s the outlook on CPI in previous Augusts. We will see this year’s August CPI value on Friday.

What do you think? What should we expect?

The new regulation in special tax income on the automotive sector is expected to contribute 0.3-0.4 points to the CPI (Daily Dunya, August 16). Moreover, some said the main reason behind this regulation was to ease down the rise in prices. I don’t think that’s all there is.

Undoubtedly, the foreign exchange rate will have a positive impact on CPI. The USD exchange rate will decline by 1.5% against the lira according to August averages. So there isn’t pressure on prices from the exchange rate.

The regulation in special income tax will decrease the prices and although the foreign exchange rate is not pressuring the prices, it won’t raise them. This is all good. Meanwhile, there are a few undesired developments in terms of inflation.

The schools are expected to open on September 6. Of course, the undesired development is not the reopening of schools but it sure will have an impact on inflation. The stationery expenditures come first. Or the uniforms. They both concern the students.

The rise in fruit prices is especially attention-worthy to me. The prices were already quite high and I’ve observed even more increases in the past week. To tell you the truth, I have no idea why the fruit prices are increasing. I don’t know if there are any shortages but what I know is that these increases will have a prominent impact on the August CPI.

There’s something else that makes the August rate critical. The annual increase in CPI stood at 18.95% in July. If prices increase by 0.91% in August, the annual rate at the end of August will rise to 19.01%. The importance of 19% is due to the policy rate being the same rate.

In this case, would the Central Bank go for a rate hike in September or disregard the inflation rate as it belongs to the past year and focus on the interest which will be next year’s rate?

It’s easy to say all these. But would such an approach be enough to convince the public?

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