The CBRT published the summary of the Monetary Policy Committee (MPC) meeting dated July 23. In the inflation section of the summary, attention was drawn to the rigidity in services inflation in particular. The MPC summary stated, “The pricing behavior prevailing in the services sector causes significant inertia and the effects of shocks on inflation to spread over a long period of time.”
The Central Bank gave the message that tight monetary policy will be maintained until a significant and permanent decrease is achieved in the main trend of monthly inflation and expectations converge to the forecast range.
The CBRT Monetary Policy Committee summary continued as follows:
“The high course and rigidity of services inflation, inflation expectations, geopolitical risks and food prices keep inflationary pressures alive.
Annual inflation was 50.6 percent in the core goods group in June, while it was 95.3 percent in the services sector, approximately 45 points higher. In addition, the diffusion index for the services sector showed that price increases continued to spread throughout the sector. In this respect, when recent consumer inflation figures are taken into account, there is a risk that inflation in certain service items, especially rent, will remain high for a while. In June, communication services and, with the impact of the holiday, transportation services were the prominent items. Although rent increases slowed down compared to previous months, they continued to be high.
Leading indicators monitored through Retail Payment System (RPS) micro data indicate that monthly rental inflation will increase due to the increase in the contract renewal rate in July. On the other hand, both the rental increase rates in new and renewed contracts obtained from PPS micro data and the rental rates monitored through housing valuation reports are below the current annual rental inflation in the CPI. This situation implies that annual rental inflation in the CPI will slow down in the coming period. On the other hand, as a result of the high inertia in this item, rental inflation will maintain its high level; and will continue to be important in the course of consumer inflation, albeit decreasingly, during the disinflation process.
Emphasis on private university prices
Transportation services prices recorded a high monthly increase in June, also due to the impact of Eid al-Adha. The increase in communication services prices strengthened compared to the previous month due to mobile phone and internet fees as well as postal services. In addition, education services stood out among the other services subgroup with the fee updates related to private schools. It is assessed that the impact of private school fees, which have a high tendency to index to past inflation and are also affected by fee developments, on consumer inflation will gradually slow down in the summer months, depending on the price announcement dates. On the other hand, it should be noted that the impact of price adjustments related to private university fees will be felt in September on education services inflation.
Domestic producer prices increased by 1.38 percent in June, while annual inflation decreased by 7.59 points to 50.09 percent, also due to the low base. When examined according to main industry groups, energy prices stood out with a 2.22 percent increase, while monthly price increases in the remaining groups were observed to be more moderate, especially in intermediate goods.
The decline in international commodity prices that began in late April continued in June. In terms of the breakdown, global energy prices remained nearly flat, while non-energy commodity prices declined. As of the first three weeks of July, commodity prices remained flat overall, although they differed by subgroup. During this period, global energy prices increased, while declines in non-energy commodity prices continued. In particular, Brent crude oil prices, which were at an average of US$82.6 in June, rose to around US$87 in the first three weeks of July.
The Global Supply Chain Pressure Index remained close to its historical trend in June. Global freight indices have recently exhibited a different outlook. While global and Chinese container indices increased after April, dry bulk transportation indices continue their relatively moderate course. The limited increase in domestic suppliers’ delivery times in May showed a normalization trend in June. With the continuation of the moderate course in the basket exchange rate, exchange rate-related pressures have decreased significantly. Manufacturing industry PMI data in June showed a slowdown in both input and final product price indices, indicating that inflationary pressures have eased.
According to the results of the Market Participants Survey in July, inflation expectations continued to decline in all maturities. The twelve-month ahead inflation expectation decreased by 1.8 points from 31.8 percent to 30.0 percent; and the twenty-four-month ahead expectation decreased by 1.0 points from 20.3 percent to 19.3 percent. In addition, the current and next year-end inflation expectations were revised downward by 0.5 and 0.1 points to 43.0 percent and 25.4 percent, respectively. The five-year ahead inflation expectation was measured at 11.5 percent. Although inflation expectations declined in all maturities, current levels continue to pose an upward risk to the inflation outlook. When we look at real sector expectations, the annual twelve-month ahead inflation expectation of firms, which was 56.2 percent in June, decreased to 55.0 percent in July, indicating a limited improvement. In the same period, there was a limited increase in household inflation expectations for the next twelve months, from 71.49 percent to 71.98 percent. The Committee closely monitors the compatibility of inflation expectations and pricing behavior with forecasts.
Leading indicators indicate that monthly inflation in July will temporarily increase as a result of administered-directed price and tax adjustments that are relatively outside the scope of monetary policy and supply-side developments in unprocessed food prices. In contrast, the increase in the main trend is expected to remain relatively limited. In energy prices, a significant increase is expected in July due to the increase in electricity tariffs for residences, the SCT update in fuel and bottled gas prices, and the increase in mains water prices. The price increase in electricity for businesses is expected to negatively affect service sector prices through the cost channel in July and the following months. An upward trend is observed in transportation service prices due to the increase in fuel prices. While prices in the alcoholic beverages and tobacco group increase following the automatic tax increase, price increases originating from manufacturers are also observed in alcoholic beverages. The outlook in alcoholic and non-alcoholic beverage prices also negatively affects the restaurant-hotel group through the beverage services channel. In addition, it is estimated that some of the increase requirement will be carried over to the next month as a result of the partial reflection of the tax-related effect on tobacco products to the final prices. In the food group, fresh fruit and vegetable prices increased significantly in July due to the effects of temperatures above seasonal norms, while a more moderate course is observed in food other than fresh fruit and vegetables. Leading data indicate that the price increase in the core goods group has been moderate compared to other groups, together with the moderate outlook in the exchange rate in the recent period and the reflections of domestic demand developments. In summary, leading indicators indicate that the items that will increase monthly consumer inflation in July are energy, unprocessed food, alcohol-tobacco groups, whereas the increase is relatively more limited in the core indicators that exclude these groups.
Source: www.dunya.com
