Price indexes analysis in the framework of inflation targeting

Inflation is a problem in Turkish economy that has kept its importance and needs to be solved for the last thirty years. In our country, where prices has raised sixty eight times since 1968, there has been used a lot of precautions and various nominal anchors. After the crisis in 2000 and 2001 floating exchange rate regime has been accepted, by the changes in Law of Central Bank, the basic reason of The Central Bank has been determined as price stability and inflation targeting has started being used in 2006. In this regime, The Central Bank plan on an inflation rate to reach price stability. Money policy enforcement personnel have to follow the dynamics causing inflation carefully in order to reach the inflation rate they announced. In economy, at this point, it is vitally important for policy enforcement personnel and decision makers to be able to understand and read price indexes used for evaluating inflation caused by rise in demand level, increase in exchange rates, current account deficit, and budget deficit, cost increase, expectations etc. In Turkey, like many countries inflation rate is calculated by Wholesale Price Index and Consumer Price Index. Even though these two indexes are different from each other in enclosure, it is known that the sub items are closely related. The reason for policy enforcement personnel to give Wholesale Price Index first is that it is thought to affect consumer prices in the medium term. According to acceptance this way of thinking, it is doubtless that following the changes in Whole Sale Price Index would make it easier to predict Consumer Price Index. Studies done for Turkey showed that Wholesale Price Index and Consumer Price Index are co integrated series and changes in Wholesale Price Index effects the Consumer Price Index in the same direction in the medium term. What lay behind the changes in the Consumer Price Index is the changes in the Wholesale Price Index. This relation can be seen easily between the prices of food and agriculture prices. Taking into consideration this relationship, if the Central Bank foresees a rise in consumer prices, it firstly increases short-term interest rates in order to repress the demand. When prices showes an increase because of exogenous reasons like energy prices, improvements in international markets, it declares that with the reasons.