March Inflation: Big Downside Surprise

Consumer Price Index inflation in Turkey surprised significantly on the downside in March on the back of falling food prices. According to the data released by the official statistics office annual inflation slowed to 7.5% y/y from 8.8% in February. On a m/m basis it remained stable being well below the consensus of 0.5%. However, the improvement in core inflation was less satisfactory as the I index (core inflation) only lowered by 21 basis points to 9.5%.

Turkey Inflation - Headline versus Core

Turkey Food Price Inflation

Note that the food price inflation for March at 4.1% was the lowest figure recorded since May 2012, and Turkey has been able to post single-digit annual inflation in food prices only 7 times over the past 34 months. Interestingly, March inflation was negative for the first time since 1973. The divergence between headline and core inflation reached 2.05% with lower food and oil prices, which may lead consumer confidence increasing in the following months.

The impact of the hike in national minimum wage on services prices is to keep core inflation rate higher for a while. On a positive note, the decline in the core inflation signaled a weakening pass-through effect as Turkish lira relatively remained strong.

We expect the headline inflation to remain in the 7.5%-8% range and end the year above 8%. Within this perspective we foresee Turkish central bank continuing with rate cuts of 25 basis points on the upper band of the interest rate corridor each over the next two months. We also see further rates unlikely because of the risks including higher inflation expectations in the second half of the year and deteriorating emerging risk sentiment that would hit the local currency as real rate in Turkey are still lower than EM peers at the moment.

Turkey Inflation Beats Expectations

According to data released by the Statistics Office this morning, headline CPI was up 1.8% mom, compared to the consensus forecast of 1.25% mom. Meanwhile year-on-year headline inflation is up to 7.71%, quietly higher than CBT’s target.

Food price inflation surprised the market on the upside, remaining at 11.4% yoy in October, which is the main component of the calculation. In addition, core items (excluding food, energy and tobacco) was up to 7.5% year-on-year inflation in October, comparing to %7.0% in September.

The outlook for price stability is highly negative in my opinion.

Turkey Inflation Chart 1 - Headline & Core Inflation for the last 10 years and the trendline

Turkey Inflation Chart 2 - Food Prices

The recent depreciation in Turkish Lira will drive the CPI higher.

Well, actually I do not know how but the projected inflation rate by the Central Bank of Turkey at the end of 2014, which is 5.3%, as well as the market sees this as an impossible target to reach.

More tightening should be expected by the CBT to support the Turkish Lira. As a result, it is likely to see higher interest rates both in money market and credit market. Another is important is that, we might see an increase in the total amount of FX deposits in banks, while total amount of TRY deposits dramatically falls. These worrisome developments in the inflation side might be in the FI market in double time, as USDTRY hit 2.02 this morning.