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Turkey: Inflation accelerates on weak lira and energy costs

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While consumer prices in Turkey increased by 2.39% (median expectation 2.59%) in October, annual inflation was realized as 19.89% (September 19.58%, median expectation 20.35%). Due to the increase in energy costs and the weak lira, price hikes accelerated in October for the fifth month in a row. Although the realization of inflation is below the general market expectations, we think that data that do not make a dramatic difference to the expected value should not be considered as a surprise variable in economic terms, and it would be more useful to look at the long-term trend of inflation. In this context, we make the assessment that the trend converging to 20% may continue and that we are facing high inflation. Our expectation was for a monthly headline inflation rate of 2.1% in October.

 

If we look at the sub-items of inflation; An increase is observed in all main expenditure groups. The increase in food prices, which make up about a quarter of the consumer basket, was limited to 1.92% in October. This rate; lower compared to items such as clothing and shoes, tobacco, transportation. Annual price increases in food, on the other hand, are still higher on a broad level, although declined from 28.79% to 27.41% due to the weak lira and supply bottlenecks. Food inflation remains well above official forecasts, despite the central bank’s revision of its end 2021 forecast to 23.4% from July’s 15% last week. In the next period in food, the increase effect is also important on the global side (FAO food index is at the peak of the last 10 years), we observe very rapid increase rates especially in basic products such as wheat. The content of food and agricultural products related to imports shows that in addition to the increase in global prices, the increase in the exchange rate will form the basis for the hikes made or to be made. This may cause food inflation to remain high at the end of the year and next year.

 

Energy inflation rose from 22.77% to 25.76% in October compared to the previous month. The tax mechanism (equal mobile system), aimed at stabilizing gasoline prices, softened the increase in global energy prices. Despite this, we can see the effect of energy prices faster on a direct consumer basis, as the next price hikes will be directly reflected on the pump prices, with the SCT margin over.

 

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As the items that showed a higher increase than headline inflation, clothing and footwear stood out with 7.56%, alcoholic beverages and tobacco with 5.97% and transportation with 2.43%. Although core inflation, which excludes volatile items such as food and energy, was 16.82% in October, slightly down from 16.98% in September, the difference is not so dramatic and the strong inflationary pressures underlying the headline figure are also driven by core goods and services. proves to have an effect.

 

In general, we are faced with a high inflation problem. If we consider the global inflationary trend, local cost factors and pricing factors, the seasonal high increases and their impact on annual inflation will continue in November and December. This indicates that inflation may remain slightly (not much below) 20% at the end of the year, with the most optimistic forecasts. Periodic increases are likely to remain high. We think that the high increase in natural gas will have a general spillover effect with its reflection on electricity costs and various goods, although it is not directly aimed at households. On the other hand, the inflation effect of the increase in various goods and services, which will continue due to the increase in exchange rates, should be taken into account. The flash effects of the cost incursion experienced on the PPI side cause rates far above the consumer price increase. The producer price increase, which was 5.24% on a monthly basis, caused the annual PPI to rise to 46.31% and the gap with the CPI to deepen.

 

The Central Bank will hold its next rate setting meeting on November 18. The acceleration in inflation reduced Turkey’s inflation-adjusted interest rate (real interest) to -3.89%. This means a move towards the lowest band of the emerging market standard in terms of real returns. Two consecutive surprise rate cuts since September kept the lira’s depreciation against the dollar near 20% this year, marking the lowest performance among similar currencies. We consider that it is a composition that will not help price stability in terms of the reaction range regarding global financial conditions, the trade-off between emerging market currencies and the deposit attraction of the lira. On the other hand, when we evaluate in the light of the factors rationalized as the subject of rate cuts in the last policy trend of the Central Bank; We see that no anchor in inflation is in connection with policy. In the action leg, this shows that the Central Bank criterion is not currently on the actual, core or expected inflation side, at least the interest position relative to inflation is not in practice. Apart from inflation, since the desired standard for growth and current account balance seems to be more decisive, we expect the Central Bank to continue to be willing to cut interest rates, even though it has limited space (normally, we think there is no rate cut area). In this context, we reiterate our reservation that the movements and uncertainties that may arise in the financial markets, mainly due to the low lira interest rate, may be compelling for policy transformation.

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