Measuring consumer inflation expectations in Turkey

This paper uses survey data to assess inflation expectations of consumers obtained from Consumer Tendency Survey (CTS) of the CBRT (Central Bank of the Republic of Turkey) and Turkish Statistical Institute (TurkStat). The variables have only been presented in the form of qualitative statistic. Qualitative survey can only provide a direction of change for a given variable instead of an exact figure. Therefore, expectations collected as qualitative survey data are converted into quantitative estimates of the variables under consideration via different quantification methods. This paper presents the results of these methods such as Carlson-Parkin method, balance method, regression method used in order to estimate numerical measures of Turkish consumer inflation expectations based on CTS. Inflation expectations play an important role as leading indicators for the application of the monetary policies. The ability to measure inflation expectations is an integral part of central bank policy especially for central banks that are implementing inflation-targeting regime. A forward-looking perspective is crucial to the success of inflation targeting. Therefore, a central bank having primary objective of price stability are interested in inflation expectations. Hence, the study also aims at examining the formation of consumers’ expectations. The survey period used in the study covers the period from December 2003 to April 2010. Then inflation expectations can be calculated for the period from November 2004 to March 2011 and compared with the realizations. The expectations derived from Carlson-Parkin method, balance and regression methods are analyzed for this time period and the preliminary results show that the expectations derived from nonlinear regression model is found to be the closest one to realizations. Therefore, the expectations attained from regression model is used for the later analyses. Since the investigated series are nonstationary, Cointegration analysis is also carried out. The rationality test reveals that the hypothesis of the rationality of inflation expectations has to be rejected.