Turkey: Inflation continues to rise, while the easing cycle continues

Consumer price inflation continued to rise in September, increasing by 3.08% on a periodical basis (in line with the market expectation of 3.15%, slightly below our expectation of 3.8%), and on an annual basis it reached 83.45% in September from 80.21% in August. While the easing cycle of the Central Bank continues, we think that this rate does not end the upside risks in inflation and that both the loose policy implementations and domestic/foreign price cycles will continue to feed inflation in the October period. In this context, we expect inflation to be at a level very close to the realization of this peak in October as well. At the end of the year, we think that inflation will be around 73.5%. With the inflation realization in the last September, the policy rate adjusted for inflation fell to -71.5%, which is by far the lowest among peers.

If we look at the sub-items of inflation; Although the increases in transportation, food and furniture prices and public services fees were effective, there was a monthly increase in all items in the main expenditure groups. In these items, we expect the first effects of electricity and natural gas price hikes, as well as the lagged effects in the coming months. Although food inflation increased from 90.25% to 93.05% on an annual basis, we see that monthly price increases were slightly below expectations. We think that there may be a food inflation that will be more reflected in the indicators of the next month due to both input and supply risks in food and seasonal changes. Therefore, upside risks will continue in this item. We expect the developments in the dairy market to have an impact on a wide range of goods, from cheese to meat in food. The effects of price hikes will continue to keep food inflation high.

Core inflation continues to rise, and we reached the level of 68.1% in indicator C in September. The gains seen in core inflation indicators show that inflation stickiness has increased with monthly increases close to the headlines. On the core goods and services side, we will have to observe the input effects of the latest energy hikes and the spillover effect of the developments in exchange rates. The rise in PPI also continues at a high level. The PPI, which increased by 4.78% on a monthly basis in September, shows that the cost pressure is still continuing and creates a basis for lagged effects on consumer inflation. On an annual basis, a new peak was recorded in PPI with 151.5%. In terms of the sub-details of the PPI, it is seen that these increases come from items such as electricity, gas, steam and air conditioning arising from energy and transportation.

As the items that showed a higher increase than the headline inflation, housing with 9.99%, education with 6.99%, communication with 3.40% and various goods and services with 3.19%.


The deepening of the divergence between policy rates and inflation rates. The core indicator excludes unprocessed food, energy, alcoholic beverages, tobacco and gold. Source: Bloomberg, CBRT, TURKSTAT, Tera Yatirim

Although increasing inflation is broad-based, it also confirms our concerns about stickiness in inflation. At the same time, the energy crisis in Europe, the Fed's aggressive policy affecting global interest rates, the deepening effect of the EURUSD parity on the current account deficit will put us on the inflation effect that we will be exposed to from factors such as energy and foreign currency. We believe that there should be a focus on the factors that cause problems in the inflation structure rather than a decrease in the rate. Despite the fact that September was very high, we can show that the energy hikes, which have not yet fully reflected, and the difference in month-end and month-end prices in terms of the reflections of hikes, are below our expectations. With the increase in input costs after the last price hikes, we will see both the direct effects in October and the delayed spillover effects on the inflation rates in the next period. We think that the high volatility in product prices will continue.

Annual inflation in Turkey. Source: Bloomberg, TURKSTAT, Tera Yatirim

If we look from the perspective of the central bank; The contrast to the tightening perspective of central banks in developed and developing countries continues. In August and September, a total of 200 bps rate cuts were made and the policy rate was reduced to 12%. The reference we have taken from the current policy text confirms that the disinflation framework is based on the liraization strategy and that the main policy perspective is growth-oriented. Considering the belief of the economic decision makers in the heterodox policy implementation and President Mr. Recep Tayyip Erdoğan's single-digit interest demand until the end of the year, we think that the Central Bank may continue to cut interest rates with the 20 October MPC and afterwards, and the destination of this may be open-ended. We still consider the effects of the loose policy cycle on inflation over the exchange rate as a pessimistic factor.

Kaynak: Tera Yatırım-Enver Erkan
Hibya Haber Ajansı


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