Therefore, under the assumption that oil and food inflation will follow a more benign path in 2008 than 2007, we expect some contribution to disinflation from the base effects. Figure 11: Response of Inflation to Monetary Tightening 18  11  17  10  16  9 8  15  7  14  6  13  5 Policy Rates H (right axis) H exc. Processed Food (right axis)  12 11  4 3 1207  1007  0807  0607  0407  0207  1206  1006  0806  0606  0406  0206  2 1205  10  H: Unprocessed food, energy, alcohol beverages-tobacco, and gold excluded CPI. Source: TURKSTAT, CBRT. We believe that existing supply and demand conditions continue to support disinflation. The sharp slowdown in the second half of 2006 created an ample slack in the economy (Graph 12). Although domestic demand showed some signs of recovery in the second half of the year 2007, the pace of economic activity does not appear to be fast enough to eliminate the output gap. Moreover, the uncertainty created by the ongoing difficulties in the mature credit markets is expected to hold back the domestic consumer and investment spending in the forthcoming period. Accordingly, our medium term projections are constructed under the assumption that demand and capacity conditions contribute to the disinflation process throughout 2008. 2  Official core inflation measures, published under the name “Special CPI Aggregates“ (SCA),do not exclude processed food prices.
Food, Energy and Tobacco  2007  Services  Source: TURKSTAT, CBRT. Table 1: Contribution to Annual CPI Inflation (Percentage Points)  Energy  Food*  Tobacco**  Goods Excl. Food, Energy Tobacco Services  2007  1.57  3.42  0.87  0.24  2.28  2006  1.51  3.09  0.28  1.43  3.33  * Food: Food and non-alcoholic beverages ** Tobacco: Tobacco products and Alcoholic beverages. Source: TURKSTAT, CBRT. Distinguished Guests, Elevated prices of crude oil, agricultural products and other commodities exert inflationary pressures all over the world. Recently, both the developed and emerging economies have been facing a rise in inflation. Inflation in Turkey followed a more favorable trend in 2007 compared to other emerging economies under inflation targeting, notwithstanding the administrative price hikes in November, which added by about 1-percentage point to the Turkish CPI inflation. During the past year, inflation in Turkey declined to 8.4 percent from 9.7 percent, while the average of inflation in emerging market economies under inflation targeting rose from 3.4 percent to 5.1 percent (Figures 4&5). Among the mentioned economies, only 4 countries experienced a decline in inflation in 2007, including Turkey, which recorded the highest rate of decline. In other words, Turkey was the country with the largest rate of decline in inflation, in comparison with other economies in this group.