Will prices fall with inflation?

SHAFAQNA TURKEY – Annual inflation, which exceeded 85 percent in October, fell by 1.12 points in November. Thus, annual inflation fell for the first time since May 2021.

So, when inflation falls, will prices fall? To answer this question, first, “How many types of inflation exist, what data does TURKSTAT explain?” let’s look at it.

You can access all the definitions and data we have used in the news on the TURKSTAT website or via the CPI link recently announced by TURKSTAT.

The CPI bulletin published by TURKSTAT has four different inflation data. These:

• Rate of change from the previous month

• Rate of change compared to December of the previous year

• Rate of change compared to the same month of the previous year

• Rate of change according to twelve month average

What inflation should a citizen look at?

All this, of course, is connected. What directly concerns the citizen’s pocket is “the rate of change compared to the previous month.” What does it mean? For example, according to the latest bulletin, inflation increased by 2.88 percent in November compared to the previous month (October). Accordingly, the total value of products and services in the inflation basket increased from 100 lira to 102.88 lira.

To give a more concrete example, inflation for food and non-alcoholic beverages was 5.75 percent in November. This means that the cost of a grocery basket and non-alcoholic drinks, which was bought for 100 liras in October, rose from 105 liras to 75 cents in November.

So what happened to annual inflation when food and non-alcoholic beverage prices rose 5.75% between October and November? During this month period, annual inflation decreased from 85.51% to 84.39%. In other words, despite a slight decrease in annual inflation, there was a serious increase in food prices.

In this case, even if annual inflation falls, prices do not fall, but, on the contrary, continue to rise.

So when will prices drop?

To reduce prices, the monthly inflation rate must be below zero; So there must be a minus.

As long as monthly inflation is above zero, prices will rise each month. Prices will rise more or less depending on the rate of inflation. However, if there is no negative inflation, there will definitely be an increase in the price of goods and services. As long as it doesn’t turn negative, a decline in inflation is a slowdown in price growth. Products continue to grow; however, there is less growth compared to previous months.

Now consider prices during a period when annual inflation declines throughout the year. The time period that shows this best in the latest period is from October 2018 to October 2019. Why is this? While annual inflation stood at 25.24 percent in October 2018, it gradually eased to 8.55 percent in October 2019.

Well, did food prices decline during this period of time when annual inflation fell from 25 percent to 9 percent? Have electricity and gas prices also fallen? Have the prices of meat, fish, milk, eggs, cheese and bread fallen? Transportation cost? clothes?

Among these examples, only the price of clothing has fallen; the price of all the rest has increased during this year (October 2018 to October 2019). According to TUIK, the growth rates were: gas 19.9%; fish 19 percent; electricity 18.9%; bread and cereals 15.3%; rice 14.9%; transport 14.3 percent; food 7.5%; meat 7 percent; fats and oils 6.7 percent; and milk, cheese, eggs 2.3 percent. Over the same period, clothing prices fell by 0.9 percent.

On the same chart, we can see the annual inflation rate and how the price of selected goods changes. The right column shows how the annual inflation rate changed between October 2018 and October 2019.

The left column shows how the prices of food, transport, bread, meat, electricity and gas have changed. We will equalize the price of all these selected items to 100 Lira in October 2018. A drop below 100 indicates that prices are falling. The price of all selected products that came to us in October 2019 is above 100 lire. The price of bread, which was 100 liras in October 2018, is 115 liras in October 2019; food for 108 lire; meat for 107 lire; electricity increased to 119 liras and gas to 120 liras.

During the same period, annual consumer inflation fell from 25.2 percent to 8.6 percent.

Why is this happening?

So why does this situation arise? Its technical definition is “basic effect”. In other words, while prices rose faster in the previous period, there was a slowdown in price growth. The raise is no longer as high as it used to be; but the journey continues.

The Central Bank explains the “base effect” on its website as follows:

“When calculating change between two periods, if sales are significantly lower or higher than usual in the period specified for the change, the change is attributed to the effect recorded in the period in which it is calculated. For example, when calculating annual inflation in November 2014, the percentage change in the consumer index for November 2014 compared to the November consumer index for 2013 is taken. If in November 2013 the consumer index grew at a much lower rate than usual, in November 2014 year, there will be a base effect that will increase annual inflation.” MOST

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