Turkish Inflation Edges Higher As Downtrend Stalls

(MENAFN- ING)

Monthly inflation in October came in at 2.58%, above market consensus and our 2.4% call, driven by unprocessed food, energy, and clothing. The annual figure ticked up to 29.77% (vs the Central Bank of Turkey's forecast of 28% in the latest inflation report) from 29.73% a month ago. This reflects volatile seasonal data, but isn't too alarming for the central bank.

Core inflation (CPI-C) rose by 2.1% month-on-month, below the level recorded last year, leading to a drop in the annual rate to 28.3%. The central bank's management of the currency – with modest nominal lira depreciation of 1.7% on average in October and 18.4% year-on-year, significantly below inflation over the same period – limited the increase, as the CBT maintains its exchange rate policy to support the disinflation objective through the cost channel.

In October, PPI stood at 1.6% MoM and 27.4% YoY, and has floated in the 26-28% range over the last 12 months. A significant part of the monthly increase was driven by food products, in addition to clothing and apparel, basic metals and crude petroleum and natural gas. Against the current geopolitical backdrop, global commodity prices, particularly oil prices, will remain the key risk factors for PPI and CPI in the near term.

Preliminary seasonally adjusted data, set to be published by TurkStat and closely monitored by the CBT, indicate that after a strong improvement in September, the preliminary seasonally adjusted figures showed an increase in the headline and major sub-indices, i.e., goods and services.

Evolution of annual inflation (%) Source: TurkStat, ING

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A breakdown of the data shows that:

Food and clothing made the largest contributions to the headline (0.84ppt and 0.82ppt, respectively). Benign processed food recorded a pronounced slowdown in comparison to the same month last year, limiting the adverse seasonal effects from processed food. Clothing, on the other hand, spiked on the back of seasonality, though it remained close to the four-year average. The transportation group followed with a 0.36ppt contribution to the headline, driven by higher energy prices and the gradual unwinding of special consumption tax (SCT) on fuel products. The housing group was another major contributor as a result of rent and energy-related items, with a monthly impact on the headline of 0.34ppt.

As a result:

Goods inflation moved up to 25.6% YoY, while core goods inflation also increased, reflecting the impact of clothing and footwear, despite benign durable and other core goods, given the CBT's tight grip on the exchange rate supporting disinflation in this group. Services inflation maintained a downtrend, falling to 36.6% YoY, while rent declined further, with gradual normalisation continuing for more than two years.

Annual inflation in expenditure groups Source: TurkStat, ING

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Overall, while slightly higher-than-expected CPI data ended the downtrend in October, we continue to expect that annual inflation is likely to remain below 30% at the end of this year. Uncertainty surrounding oil prices – along with their spillover effects on other commodity prices – continues to pose risks to the inflation outlook in the near term, while a sustained escalation in US-Iran tensions should rapidly add to pricing pressures given the ongoing unwinding of the sliding scale mechanism.

In the latest MPC meeting, the CBT altered its wording and shifted the emphasis to the magnitude and timing of future policy steps from“monetary policy decisions”. This change implies that unless there is a material shift in the conditions that prompted the easing cycle, the Bank is likely to continue its rate-cutting process in December as well. In our view, October inflation is unlikely to be a game changer here.

The key risk will remain the Middle East conflict and a shift in the disinflation path. The CBT will also continue to closely monitor demand conditions, international reserves and depositor behaviour to determine future policy actions. The inflation report due for release on 12 November should also provide additional evidence on inflation developments and the scope for further monetary easing in the period ahead.

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