A new blog penned by Central Bank of Turkey (CBRT) research staff reveals divergent inflation expectations among households, businesses and “market participants”, the monthly survey of which had thus far constituted the only benchmark for the Bank to set monetary policy.
The survey reveals extraordinarily high inflation expectations vis-a-vis the monthly results published in the monthly Expectations Survey. It also explains why perceived financial conditions remain too loose for disinflation.
The blog notes:
The group with the highest inflation expectations over time is the household; It is noteworthy that the group with the lowest inflation expectations is market participants. This is consistent with international findings showing that households’ inflation expectations are generally higher than other groups. When the trends are examined, it is seen that household inflation expectations have shown an increasing trend since 2015, when the data started to be calculated, to reach their peak in August 2023. After this date, expectations follow a fluctuating course to decrease to 71.5 percent in June 2024.
The inflation expectation of the real sector, which has lower volatility and level than households, shows a significant jump starting from the last quarter of 2021 to reach its highest level towards the end of 2022; In the January-June 2024 period, it remains horizontal at around 55 percent.
Market participants’ expectations, on the other hand, reached a peak of 45.3 percent in October 2023, then decreased regularly to 31.8 percent as of June 2024.
Although the level varies, the downward trend in inflation expectations for the next 12 months is similar in all three groups. The determination of the CBRT to keep monetary policy tight is expected to continue the improvement in inflation expectations.
The blog adds:
It is known that the headline inflation level is an important factor in households’ future inflation expectations. Therefore, in addition to the household’s expectation of inflation in terms of level, it is also important to follow their expectations regarding the direction of inflation. In this context, the directional trend of households’ inflation expectations in the next 12 months is also shared with the public in the Sectoral Inflation Expectations publication. The share of those who expect inflation to decrease increases significantly as of March 2024 to 33.5 percent as of June 2024. This rate is expected to increase further as inflation expectations stabilize.
ANALYSIS
It remains to be seen whether CBRT will conduct monetary policy and issue forward guidance based on its official Market Participants Survey, or incorporate the results of these two new polls into its decision making.
Since household spending constitutes two-thirds of GDP, it would be extremely unreasonable for the governors to judge the tightness of monetary policy by the Market Participants Survey. Yet, if they choose to give priority to the new household survey, rate cuts become impossible not only in 2024, but also likely in 2025. To recall CBRT’s 2025 CPI target is only 14%.
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