Foreign exchange rates pose the biggest threat for inflation

July inflation was generally in line with market expectations; thus annual inflation rates continued dropping. Annual inflation as of the end of July is at its lowest level for the past 26 months, even lower than May 2013, becoming 6.81 percent. 

Despite this, market experts are not hopeful on inflation. They especially regard the increasing foreign exchange prices as the biggest threat to inflation. The dominant expectation is that annual inflation will soar starting in September, with the base effect disappearing.  

In its inflation report last week, the Central Bank increased its estimates with a very small margin and raised its annual target from 6.8 percent to 6.9 percent. On the other hand, even according to optimistic estimates in the markets, inflation at the end of the year is expected to be 7.5 percent or higher.  

Last year in August, the increase in the consumer price index (CPI) was 0.09 percent, in September 0.14 percent, in October 1.90 percent and in November it was 0.18 percent. In December, there was a decline of 0.44 percent. End-of-year inflation was 8.17 percent. 

At the end of this year, an annual inflation rate of over 8 percent is not expected. Generally, the opinion that it will stay between 7.5 percent and 8 percent is dominant. However, if there are very rapid movements in foreign exchange rates after this, then last year?s end-of-year inflation figure can again be reached. 

Both the Central Bank and market players expected the July inflation figures to be low and a decline in the annual inflation rate. For this reason, the figures disclosed at the beginning of the week were not a surprise. 

Central Bank Gov. Erdem Ba?ç?, while reading the inflation report last week, said they expected...