The highest monthly increase was 2.29% in the index for food and non-alcoholic beverages. The indices rose for education by 2.28%, for clothing and footwear by 1.62%, for hotels, cafes and restaurants by 1.07%, for housing by 0.97%, for miscellaneous goods and services by 0.79%, for transportation by 0.61%, for health by 0.08%, and for alcoholic beverages and tobacco by 0.02%. The indices declined for communication by 0.50%, for recreation and culture by 0.71%, and for furnishings and household equipment by 1.24%.
These results represent a marginal improvement in the annual inflation rate from the 7.39% recorded in August. As Serhan Cevik points out, September is always a tricky month in Turkey, given seasonal fluctuations and other possible economic shifts. This year has been even more challenging because of the Ramadan effect. Based on the lunar calendar, the month of Ramadan starts 10 days earlier each year, resulting in another type of seasonality in countries with a predominantly Muslim population. The effects of Ramadan and festivities are especially significant on food and clothing prices. And this is exactly the difficulty we face this year. As Cevik says:
Food prices are already on the rise and the Ramadan effect — increasing food consumption by around 20% from the average of the rest of the year — could exacerbate inflation pressures. Likewise, clothing prices may show a more pronounced seasonality during and right after the month of Ramadan, intensifying ‘back to school’ price adjustments. Nevertheless, we stick with our long-standing call that disinflation will accelerate towards year-end, and especially in 2008, thanks to supportive economic fundamentals.
Food prices have increased a lot all around the world and have become a significant inflation risk in countries where food represents a greater share of the CPI. In Turkey’s case, food accounts for 28.5% of the consumption basket and thereby could make the headline figure more volatile. For example, over the past two years, food price inflation increased from 4.9% at the end of 2005 to 14.2% at the beginning of this year. After declining to 9.2% in July, food price inflation surged to 12.4% in August. This sustained increase and higher volatility in food prices is mainly a result of the changing behaviour of unprocessed food prices. The year-on-year rate of increase in unprocessed food prices surged from an average of 2.9% in 2005 to 21.8% in July 2006 and then declined to 10.8% in November 2006. However, there was yet another burst to 20.7% at the beginning of this year, followed by deceleration towards 8.9% in July. Once again, that turned out to be temporary and unprocessed food prices recorded a year-on-year increase of 16.2% in August.
Basically the good news is that inflation is on the way down, and should be in the region of 6% by the end of the year and may well fall below 4% by the second quarter of next year. However there are still large scale downside global risks arising from the potential for higher commodity prices and the impact of financial volatility on the value of the lira. Furthermore, domestic demand is set to recover in the second half of the year and especially as we enter in 2008. Given all this, the Central Bank of Turkey will most likely maintain a cautious stance and normalise short-term interest rates at a measured, gradual pace, possibly to 16.5-16.75% this year and 14.5-15% next year.