CBRT: "Household Inflation Expectations Will Provide Supply-Side Support"

According to an article published on the blog titled "The Diary of the Central Bank" by the Central Bank of the Republic of Türkiye, the improvement in household inflation expectations contributes to the disinflation process not only on the demand side but also on the supply side. The blog discusses the details of the relationships between inflation expectations and service inflation.

The improvement in household inflation expectations occurs with a delay compared to market participants and is one of the factors that slow down the decline in the rigidity of service prices. Furthermore, it is noted that price increases in products such as food and fuel have influenced households' inflation expectations.

Analysis of Supply-Side Effects The article also analyzes the impact of services directly provided by the household on inflation expectations. Household-provided domestic services or services offered by small businesses directly affect the prices of certain service items. In this context, there is a positive relationship between the inflation of services provided by households and inflation expectations.

Findings indicate that the price increases of services offered by households have risen at a higher rate compared to general CPI inflation or service CPI inflation. From January 2020 to November 2024, the price index of these services increased by 21% compared to general CPI and by 11% compared to the service index.

Econometric Findings and Effects Econometric analyses suggest that household inflation expectations lead to increases in the prices of the services provided. An increase of 10% in the difference between household and market inflation expectations corresponds to a 42 basis point rise in inflation for the services offered in the following month. Excluding periods of wage increases, when this difference is 10%, a 24 basis point increase is observed in services compared to all other products.

The results indicate that high household inflation expectations, regardless of wage increase periods, are decisive in the rigidity of service prices. The findings of the article emphasize that recent improvements in household inflation expectations will positively contribute to the disinflation process from the supply side as well.