US embassy cable - 05ANKARA688

UNCLAS SECTION 01 OF 03 ANKARA 000688 
 
SIPDIS 
 
STATE FOR EUR/SE AND EB/IFD 
TREASURY FOR INTERNATIONAL AFFAIRS - CPLANTIER 
NSC FOR BRYZA AND MCKIBBEN 
 
SENSITIVE 
CORRECTED COPY 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, TU 
SUBJECT: SUBJECT:  Turkey unveils adopted a nnew 
inflation basket along with encouraging and January CPI 
inflation data. came out   ____ with the new basket. 
 
 
1.  (U) Summary: Using new, updated inflation baskets 
for the first time, the State Institute of Statistics 
(SIS) announced February 3 that ptionswith base year 
2003, and the new inflation data based Forthe January , 
theConsumer Price Index (CPI) increased 0.55 percent 
and the Producers Price Index (PPI - replaced WPI) were 
announced as 0.55 percent up _____ and fell  0.41 
percentdown_____ respectively using the new basket for 
the first time.  The SIS says the new baskets are 
designed to capture currentthe consumption habits more 
effectively and to be consistent with the EU inflation 
data.  Market economists criticized theat SIS forwas 
not releasing the old data based on the new index, 
would making ite difficult to compare the old with the 
new data, and also said the new basket would result in 
lowerpull the price inflation numbersdownwards..  End 
Summary. 
 
SIS Announces new Inflation Methodology: 
---------------------------------- 
 
2.  (U) The State Institute of Statistics (SIS) has 
adopted new baskets for calculating consumer price 
inflation and as well asproducers price inflation 
rates.  Inflation data based on thisis announcedUnder 
the new methodology announced February 3, the SIS also 
replaced the WPI (Wholesale Price Index) with  a(PPI) 
Producer Price Index (PPI) that is designed to better 
reflect price changes more effectivelyin the corporate 
sector and allow easier comparison with the EU 
countries.   The major difference between the old and 
new basket is that weights are more evenly distributed 
among Turkey's provinces, seasonal changes will be 
captured more effectively, impacts of exchange rate 
movements will be included in the PPI, and goods 
included in the baskets and their respective 
weightsassigned to each good have been updated to give 
a more realistic picture of current consumption 
behavior. 
 
Will inflation data be manipulated? 
----------------------------------------- 
 
3.  (U) Despite some positive aspects of the new 
basket, market economists and economic columnists 
arelso heavily criticizinge it, and the SIS has been 
accused of not being transparent.  Some analysts assert 
that the new methodology is less transparent than the 
oldMarket participants in Turkey even expect the SIS to 
move away from transparency even more with the new 
methodology, which will also make historical comparison 
impossible. Erdal Saglam, a leading economic columnist 
from Hurriyet daily, wrote in his column that the SIS 
should answer the allegations, noting that new 
inflation methodology was specially designed to make 
show thethe inflation rate appear lower asbasically the 
new CPI basket will not include assumed rents for 
people who own their own houses (see para 6). 
According to the Turkish Central Bank, general rent 
prices were among the most one of the major factors 
that stayed resistant to the downward inflation trend 
Turkey has experienced in the last three years. 
 
4.  (U) Some analysts also noted that in the new 
indices, the weight in the CPI of sectors that had 
higher inflation rates would decline noticeably, such 
as the relatively high-inflation housing component will 
represent 16.9 percent of the new index, down from 25.8 
percent in the 1994-based index.  They also complained 
that SIS will not apply the new basket historically, 
making direct comparison between the old and new data 
comparison impossible.  The new methodology will also 
constantly evolve as the a moving methodology;SIS will 
update the basket and sector weights every year.  At 
this point, the SIS is being urged to increase its 
transparency to avoid data manipulations in the future. 
Tevfik Aksoy from Deutsche Bbank said in his daily 
report that the new index would make seasonal 
adjustments impossible, and east analysis of inflation 
data more difficult. 
 
54.  (SBU) Cengiz Erdogan, Head of the Department for 
Price Indices at the SIS. told Econ Specialist that he 
did not agree with the criticisms of the new basket, 
claiming that the changes in baskets and methodology 
were made to comply with the EU data and make Turkish 
data comparable with European data.  Erdogan said 
Turkey was obliged to send its statistics regularly to 
"Eurostat."  Erdogan said he had believed that the old 
inflation data did a poor job capturing actual 
inflation.  He had long believed that the old 
methodology overstated Turkey's true inflationit had 
been measured in the past years, and the new basket 
would correct this.  Erdogan said in the old inflation 
method, price movements were only measured in urban 
areas, whereas in the new process Turkey had been 
divided into 26 statistical districts and price 
movements are measured all over Turkey without 
discriminating between rural andfrom urban areas. 
(Erdogan also claimed that people living in urban areas 
easily misled the SIS surveyors, while rural people 
were always more honest with their answers.) 
 
6. (SBU) According to Erdogan, the new baskets will be 
better able to capture price movements that cause the 
inflation better.  Under the old methodology an assumed 
rent was included for people who live in their own 
house.  Erdogan said this had not been a realistic 
approach.  Instead, the SIS replaced this assumed rent 
with rural rentreal prices.  Cengiz Erdogan said the 
new index would also capture tourist expenditures in 
Turkey.  SIS vice-president Omer Toprak also saidtold 
to Econ FSN that the private sector manufacturing 
index, often used to estimate "namelycore inflation," 
will be eliminated and private manufacturing industry 
price increases would be announced in seven different 
categories and would be renamed as "special scope 
inflation indicators." 
 
1994-based and 2003-based Inflation Indices 
--------------------------------------------- ---------- 
- 
 
75.  (U)  The updated Consumer Price Index (CPI) basket 
includes 423 goods, of whichwhere 322 were also in the 
1994-based index, which are in common.composed of 410 
goods.  Of the 322 goods, 22 goods have been redefined, 
79 new products are included, and 66 are excluded from 
the basket.  Goods like DVD players, contact lenses, 
LPG for cars, the internet, mobile phones, and computer 
software are among the newincluded goods, where as 
goods like matches, sewing machines, video cameras, and 
gasolinenormal type fuel are excluded.  Alcoholic 
beverages and communication are also defined as new 
consumption groups in the 2003-based index.  In the new 
CPI, 164,043 prices are collected from 18,595 
workplaces and 4,108 households, whereas in the 1994- 
based CPI, 9,300 work place and 2,960 households were 
used to gather 96,640 group prices.  The nNew iIndex 
will be measured in 81 provinces and 72 sub-provinces, 
whereas the  1994 - based indexone had measured in 28 
provinces and 7 sub-provinces. 
IN THE NEW CPI INDEX GOOD BASKETS AND WEIGHT WILL BE 
UPDATED EVERY YEAR THROUGH A CHAIN INDEX FORMULATION, 
WHERE AS THE OLD ONE BASED ON THE 1994 CONSUMPTION 
STRUCTURE. 
 
86. (U) The SIS replaced the wholesale price index 
(WPI) with a The new "Producer Price Index" (PPI)". 
In this method, prices willould be collected directly 
from producers, before value added tax (VAT).  Under 
the old WPI, prices were collected from the whole sale 
markets, rather than directly from producing companies, 
and wholesalers' prices includede the VAT.  (and It is 
designed towill help reflectingthe cost-push inflation 
more effectively.  The PPI will not categorize public 
and private sector prices differently and will include 
753 goods, whereas 1994-based WPI included 678 goods, 
with 521 goods are common to both indices.  New PPI is 
based on information gathered from 1,816 producing 
companies, whereas the 1994-based WPI was calculated 
from 1,287 companies.The PPI is expected to allow 
comparison with European countries. 
 
January Inflation data with new inflation baskets 
--------------------------------------------- ---------- 
------------ 
 
97.  (U) Analysts had difficulty forecasting January 
inflation because it was the first using the new 
methodology.  Moreover, when the data was announced it 
surprised analysts on the low side.  Prior to the data 
release, January CPI was forecasted to increase between 
0.7 percent and-  1.2 percent and PPI to rise 1-1.5 
percent in January.  According to the SIS data released 
February 3, using the new inflation baskets for the 
first time, the CPI increased 0.55 percent and PPI fell 
0.41 percent in January.  12-months CPI increased 9.23 
percent and PPI rose 10.70 percent.  Agriculture prices 
rose 0.97 percent, where as manufacturing industry 
prices fell 1.06 percent in January.  The CPI inflation 
was 0,74 percent and PPI inflation was 2.63 percent in 
January 2004 according to 1994 - based calculation. 
The big deviation between the realization and forecasts 
was basically due to market forecasters' ignorance of 
the new methodology.  Yet following the announcement, 
market participants welcomed the results.  For example, 
Citi Group's Olgay Buyukkayali said the January 
inflation data released using the new baskets were in 
line with the 8% year-end target. 
 
10. (SBU) Comment: Despite the criticisms of the market 
economists, its looks like the new methodology is 
likely towill capture a better picture of price 
movements in Turkey. On the other hand, we do agree 
that assigning lower weight to the housing sector, and 
other expenditure groups with high price rigidity will 
make CPI inflation appear lower than under the prior 
methodology, as will basing the PPI on before-VAT 
produced goods' priceshelp us to see even lower 
inflation data in 2005. Whatever methodology is used, 
Turkey should continue with its prudent policy to keep 
the inflation trend downward. End Comment. 
Edelman