The December-January inflation illusion


Politicians want the decline in inflation to be perceived as a decline in prices. Inflation means continuous price hikes. When we say inflation decreases, we mean a slowdown in the rate of increase but not a decline in prices. Annual inflation will fall in December 2022 and January 2023 as the significant hikes observed in December 2021 and January 2022 will be eliminated from the calculation. It’s simple mathematics. However, prices won’t decrease. On the contrary, they will continue to rise.

The Consumer Price Index (CPI) rose by 47.85% in January-August, according to the Turkish Statistical Institute. The CPI increase is estimated at 65% for 2022 in line with the 2023-2025 Medium-Term Program. So, the expected price increase hovers around 11.6% for the last four months. Let’s assume that the monthly price hike was at the same level in the last four months. Then the expected hike will be 2.78%. Based on the monthly price hike assumption of 2.78%, the annual rate will hover around 82-83% in September, October, and November and will fall to 65% in December.

Although the annual inflation will decrease from 82-83% to 65% at once, prices will continue to increase even in December when this situation realizes.

Based on the monthly price hike assumption of 2.78%, the CPI will reach 11.33% in November. When the annual price hike decreases from 82-83% to 65% in December, the CPI will reach 11.33%! Where is the price decrease?

This is an illusion. It’s designed to make people think that prices have declined. Those who are looking for a decline in prices will fool themselves. The inflation target is 24.9% for 2023. The rate will be 1.87% when we assume the same level of hike every month. In other words, the monthly average price hike is estimated at 1.87% for 2023.

But inflation will decline. It’s true. Inflation will decline to 24.9% at the end of 2023 if prices increase at this level.

Annual inflation will decline as the CPI hit a record level of 13.58% in December 2021 and 11.10% in January 2022. In line with the calculation technique, these rates will be removed from the annual rate and replaced by 2.78% for December 2022 and 1.87% for January 2023. Thus, the annual rate will decline. Everyone who knows the four basic mathematical operations can calculate this.

But it’s necessary to express that this decline won’t spontaneously happen, only as a result of efforts and measures. The shortest way to this is obvious: interest rate cut. I certainly expect a rate cut in December and January. First, policy rate cut, then a decline in inflation!

The statements that will be made on January 3, 2023, and February 3, 2023, are already clear: “Didn’t we say that we would decrease inflation? We did. Didn’t we say that inflation would decline if the interest rate was cut? Now, we will further cut the policy rate and inflation will fall to 50% all at once.”

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