Why Inflation May Not Fell to Single-Digit Figures This Year

The following is an update about April inflation print in Turkey (source: Hurriyet Daily News):

Turkey’s annual inflation rate increased in April, reaching its highest level in around nine years, as a result of a weak Turkish Lira in several sectors, according to official data released on May 3.

Consumer prices in Turkey rose 11.87 percent year-on-year in April from 11.29 percent in March, data from the Turkish Statistics Institute (TÜİK) showed. Annual consumer price inflation was also at the highest level since October 2008.

The volatility in food prices again had its impact on the headline inflation registering an April reading of 16.09% y/y while the 12-month moving average stood at 7.2%. As being one of the biggest importers of Turkish agriculture products, Russia’s ban/unban policy has had influenced the pricing behaviors in the local unprocessed food markets. That being said, Turkey has not managed to reduce the dependence on intermediaries in logistics operations that has enabled oil prices and some other factors to heavily impact the food prices in Turkey. We believe that negative low-base effect will be here to stay until early 2018 that would potential lead Turkey’s annual inflation figures to stay higher than targeted range for longer than expected.

Turkey’s producer prices also hit a nine-year high in April at 16.37% on the back of the depreciating lira. This, not surprisingly, is being and will be reflected at price tags for the products, which builds a supportive case a double-digit inflation figure for the rest of the year. We also see the strong short-term momentum as we newly started to detect signals of the beginning of a malign cycle in PPI, as evidenced by the chart below.

Finally, Turkey’s inflation history also tells us a lot about the possible trajectory of the macroeconomic indicator. For this, we calculate median and adjusted average (average when maximum and minimum values excluded) of the monthly changes in monthly CPI growth over the past twelve years, and imply it to the figures reported as of April 2017. Admittedly, it is hard to forecast inflation via some simulation process, but we aim to make a modest contribution.

Our analysis shows that inflation may peak on November this year and finish the year at double-digit figures. We also see core indicators being close to the threshold of 10% this year. With pointing that this research is solely based on the historical pricing behaviors of economic agents, we fear that Turkey may perform even worse this time given the imminent further deterioration in expectations with inflation becoming hardened at the current levels.

A close look at the other factors affecting CPI such as negative low-base effect, the strong increase in lending growth, also suggests that April reading is a cause for alarm and may whip up a tsunami of opinion that an abnormal cycle is about to emerge.

October Inflation: The End of the Line

Headline inflation in October came out at 1.44% m/m pointing to an annual inflation rate of 7.16%, fell behind the expectations of 1.58% but slightly higher than our estimate of 1.40%. Meanwhile downward trend in core indicators continued, as I-index y/y change declined 7.04% in October and from 7.69% in September. In our view, October reading was another relief provided to the central bank on the inflation front, however, we do not think that clear skies are ahead.

turkey-core-inflation-indicatorsWe expect core inflation to be on the decline until yearend, and peak at 9% in mid-2017. Pass-through effect from a depreciated local currency may even lead further deterioration in inflation.

turkey-consumer-and-produces-prices-indexOn the other hand, inflationary pressures from cost channels appear to be weak.

Going forward we expect the central bank to continue to implement a growth-friendly policy using liquidity tools rather than interest rates. Our prospect is for an average cost of funding rate remaining at 7.75% for some time to come, which is 25 bps higher than 12-month forward-looking inflation expectations.