Combat inflation: Turkey’s sudden response

Time period: 18-24 December 2021

Top news story. Markets are gone for the holidays. As a result of serious anti-inflation measures, consumer prices began to fall in the US. As we have noted in previous reviews, it is crucial for Joe Biden that electors feel a clear improvement in the situation by April 2022. It is not yet easy to estimate the scope of this process, there are significant distortions in inflation statistics, and holidays bring their specificities, but we will monitor the situation.

To assess the situation, even if very general, we quote a letter from one of my correspondents from the United States:

I bought a box of pasta, and I found half a box left over from last year. Then it was 1.29, and now it’s 1.49. 15%, but who cares about that 20 cents.

But just in case, the structural crisis is still there. Contrary to the optimists’ expectations, it is likely to continue unabated, which will reduce the monetary component of inflation, but not the structural component. For example, a chart of price increases for all manufactured goods, including intermediate ones:

It is possible that the rate of inflation has slowed down, but so far they are clearly not going to fall. This means that, despite pressure from buyers, consumer prices could rise again early next year.


United States Chicago Fed National Activity Index before the holidays has become significantly worse:

United States Chicago Fed National Activity Index

Incidentally, it cannot be excluded that because inflation has been reduced, the gap between official data and the real value of the indicators has narrowed, thus reducing the fictitious addition to production, related to the converting of price increases into real output figures.

Prices in the world economy are still breaking records.

CPI (Consumer Price Index) of Mexico +7.45% per year and is at the top since 2000:

In the US, personal consumption expenditures (Chain-Type Price Index) are at their highest since 1982:

Less food and energy +4.7% per year, it’s a peak since 1989:

And even in Japan, CPI is at its peak since January 2020, as in general:

Japan Inflation Rate

and excluding perishable foodstuffs:

Japan Core Inflation Rate

And this is in Japan, which has been experiencing hopeless deflation for many decades!
PPI (Producer Price Index) of South Korea +9.6% per year, the highest since 2008:

PPI of France +17.4% per year, a record high for all 22 years of survey:

PPI of Italy +22.1% per year, which was the highest in 30 years of observation:

Spanish PPI + 33.1% p.a., on top for all 46 years of statistics:

Import prices in Germany +24.7% per year, the highest since 1974:

Import prices in Germany

The consumer sentiment in New Zealand is the worst in 5 months:

New Zealand Consumer Confidence

The Germans recorded a six-month low:

Germany GfK Consumer Climate

In the Euro Area, the trough in 9 months:

Euro Area Consumer Confidence

Turkey’s pessimism peaked in 18 years of observation:

There is, however, a very interesting point here. See the following section.

Mortgage applications in the United States fell again, despite the cut in interest rates on loans:

United States MBA Mortgage Applications

United Kingdom CBI Distributive Trades are the weakest in 9 months:

United Kingdom CBI Distributive Trades

The Central Bank of China cut the rate by 0.05% to 3.80%, before that it cut the reserve ratio for banks by 0.5%.

Summary. Counter-inflationary measures in the US – reverse REPO operations of about $1.5 trillion – have been somewhat encouraging in reducing inflation, but neither rate hikes nor higher bank reserve requirements can be used (which are already not very active, we wrote recently about the low value of the banking multiplier in the US), it is too early to talk about a significant effect.
In any case, an analysis of real wages shows that, so far, the level of wages as a whole has been declining, and the following chart shows the percentage of changes over the previous year:

Assessing the situation at the moment is extremely problematic, as both the statistics are distorted and the holidays cause serious imbalances. In general, as they say, we will keep a close watch on the situation, but a more or less adequate answer will most likely be by the end of January.
The situation in Turkey is of great interest. Its leader, Erdoğan, has decided to move away from classical monetarist recipes, and instead of raising the rate to combat inflation, which in Turkey was 40% for industry and 20% for consumer prices, we have repeatedly written about it in previous reviews, started cutting it. Consumer reaction was shown in the previous section, and the Turkish lira fell sharply but then began to rise.

In theory, lowering the rate initiates a domestic investment process, which, however, can be hindered by currency speculation. Let’s see how the situation in Turkey develops, this can give a rich food for thought for other countries, including Russia.
Congratulations to all the readers celebrating this holiday, Merry Christmas according to the Gregorian calendar, we wish everyone else good pre-holiday chores!


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