FX RATE INCREASE RAISES INFLATION

There are basically two reasons why prices rise: when supply can’t meet demand, meaning demand inflation, and rapid cost increase, or cost inflation. The biggest pressure on production costs is foreign exchange (FX) rates in Turkey. An FX rate increase is the main reason for inflation. USD peaked in September 2018 during the Pastor Crisis in terms of annual change. The rate reached 84%. The annual Domestic Producer Price Index (D-PPI) increase also exceeded 46% in September 2018. USD dropped by 10% in November 2019 year over year and D-PPI rose annually by 2.5%. The annual change in USD exceeded producer prices in 2020 and continued throughout the year due to the pandemic. Producer prices started surging more rapidly by the middle of 2020. It was impossible to control the FX rate increase and so the Central Bank launched the November operation. It was the right move but it didn’t take long. The USD, which fell to TRY 7, increased by over 20% with a new operation in March. The FX rate and D-PPI gradually diverged in terms of change in the last year as the FX rate burden of the last year still raises prices. There are also other factors, such as the increase in some commodity prices. If there are no factors, then we fill the gap, for instance, by increasing natural gas and electricity prices! Now we must further extend exorbitant price audits as FX rates jumped due to the Central Bank’s latest interest rate decision.