Turkish inflation: 20% is the new 10%?

TURKEY - Report 09 Jul 2021 by Murat Ucer

In this brief note, we estimate a few simple models of core inflation in Turkey, with a view to gauging its direction through the end of this year.

The forecasts vary depending on the model and the sample period, but post-2010, a simple Vector Autoregression model and a Philips Curve specification, the latter assuming some plausible values for the right-hand side variables, seem to produce similar forecasts, with core inflation ending the year as high as around 20%.

These exercises, while illustrative, suggest that the CBRT’s yearend forecast of 12.2% is very optimistic, assuming that energy and unprocessed food inflation will not be markedly lower.

This, in turn, would argue that, let alone cutting rates, the CBRT should raise interest rates.

Now read on...

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