Food Prices – Turkish Market News

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.

August Inflation: Short Term Relief Provided

Headline inflation surprised on the downside in August with m/m realization of -0.29% against the market expectations for a flat reading. Annual inflation lowered to 8.05% from 8.79% a month ago. Meanwhile core inflation has also declined in August to 8.4% from 8.8% in July.

The downward moves in food and clothing prices led a boosted inflation outlook. Though food prices that has remained volatile through this year make it extremely hard to estimate the trajectory in months to come. Yet, one should expect a pick-up in prices due to resumption of food exports to Russia. The inflation rate will most probably remain above the target of 7% with positive contribution from food prices. Also note that oil prices and imminent rate hike by the US Federal Reserve are likely to be influential external factors that could have an impact on the performance for the remainder of the year.

Turkish central bank will continue to loosen policy with O/N lending rate cuts until average funding rate hit one-week repo rate at 7.5%. At some point, central bank’s efforts to boost the economic activity will be increasingly relied on loosening liquidity.

Given the lower local funding costs that generates plenty of room for carry trades, we believe that short term returns are warranted in Turkish government bonds despite the cloudy outlook in inflation.

April Inflation: Slows to 3-Year Low

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.