During the same period, the average inflation in emerging market economies with inflation targeting rose from 3.4 percent to 6.1 percent. Figure 6: S&P Goldman Sachs Commodity Price Indices  750  550  Commodity Prices Metal Prices Energy Prices (right axis) Agricultural Prices (right axis)  675  450  600 525  350  450  5  250  375  3/12/2008  11/14/2007  24-07-2007  29-03-2007  01-12-2006  09-08-2006  150 17-04-2006  300  Source: Goldman Sachs. Figure 7: Inflation in Other Countries a. Inflation Rates  b.Diff. Between Turkey and Other Emerg. IT’ers*  9  Developed Economies Developing Economies Turkey  02.08  12.07  10.07  08.07  06.07  04.07  02.07  12.06  10.06  08.06  06.06  01.08  11.07  2  09.07  0 07.07  3  05.07  2 03.07  4  01.07  4  11.06  5  09.06  6  07.06  6  05.06  8  03.06  7  01.06  10  04.06  8  02.06  12  12.05  14  *Sample of emerging economies under inflation targeting covers Brazil, Czech Republic, Colombia, Philippines, South Africa, Israel, Hungary, Mexico, Peru, Poland, Romania, Chile, Slovakia and Thailand. Source: Web sites of central banks, IFS, TURKSTAT, CBT  BIS Review 62/2008  5  2.
Therefore, the materialization of upside risks would require further tightening of the monetary policy stance, while downward surprises in food and energy prices would be perceived as an opportunity to bring inflation back to the target in a shorter period. Figure 15: Inflation Alternative Scenarios  Forecasts,  Base  Scenario  Medium Term Target  Base Scenario  Pessimistic Scenario  Optimistic Scenario  and  12  10  Percent  8  6  4  2  12  2011-I  2010-IV  2010-III  2010-II  2010-I  2009-IV  2009-III  2009-II  2009-I  2008-IV  2008-III  2008-II  2008-I  2007-IV  0  BIS Review 62/2008  A protracted period of rising food and energy prices have led to significant breaches in inflation targets since the adoption of the inflation-targeting regime and consequently increased the stickiness in inflation expectations, as economic agents have become more backward looking. Under normal conditions, supply shocks are expected to alter relative prices rather than the underlying inflation trend. Nevertheless, the fact that several longlasting shocks appeared concurrently has increased the risks to price setting behavior. As a matter of fact, recent studies by the Central Bank reveal that economic agents have been increasingly grounding their expectations on past inflation figures. In this respect, recent developments in the pricing behavior and the underlying inflation trends are of particular concern. It may be necessary to pursue a tighter monetary policy should the price setting behavior deteriorate.