April Inflation: Slows to 3-Year Low
- May 04, 2016
- Self Made Trillionaire
April inflation was another negative surprise and the drop was sharper than expected for the second month in succession. The reading of 0.78% dragged the annual rate down to 6.6%, primarily due to decreasing food prices. With that being said, it is worth to note that the strong base effect was also helped the annual inflation fell this sharply.
Core inflation (the I index) continued to remain high, was stuck at 9.4% by declining only 10 bps. Considering the clothing prices which rose 12% m/m in April, there was substantially favorable developments on the core inflation front, however, the seasonally adjusted annual rate of core inflation is still slightly below 8% which is well above the targeted range of 5%-7%. Needless to say that unlike its peers, Turkish economy will be facing challenges arising out of inflationary pressures.
Owing to the improvement in the headline inflation the policy implication of April’s inflation reading may very well be another cut (50 bps) in the upper band in May. With that being said, given the strength of core indicators the headline inflation is set to rise back over 7.5% in 2H 2016 and to end the year around that level, suggesting that underlying inflation dynamic remain favorable within a mid-term perspective. As we believe that the current stance of the central bank is inappropriate for combating inflation, a tight monetary policy should be implied to reduce inflationary pressures. Also, further rate cuts in the near-term would depend on global financial conditions rather than monthly inflation readings.