Türkiye | A new basket, a tougher road to disinflation

Summary

Consumer inflation came in at 4.84%, above both consensus (4.2%) and our expectation (4.3%) in Jan26, while annual inflation edged down only marginally to 30.7%. Despite rising upside risks, given the uncertainty around the effects of recent restrictive policy steps, we maintain our year-end inflation forecast at 25%.

Key points

• Key points:
• Headline inflation deteriorated, driven by both food and core items, and seasonally adjusted (s.a.) CPI came in higher than the Central Bank’s expectation of only a limited worsening. The substantial pick-up in core inflation (s.a.) stemmed from particularly basic goods inflation, whose level surpassed its Jan25 level, confirming the importance of expectations as we could have come to the end of the gains from real appreciation.
• In the new CPI basket, the weight of energy declined by 3.2pp, while the weight of services rose significantly by 7.4pp. Contrary to speculative expectations, the weights of rent and food changed only marginally. The new weights may reduce inflation volatility, but according to our calculations, it could also strengthen inflation inertia.
• Underlying inflation trend deteriorated to close to 2.3%; while the 3-month avg. of median inflation, monitored by CBRT, has hovered around 2% for the past year, showing no meaningful improvement. Beyond the second-round effects in Feb, there is an upside risk on unprocessed food inflation due to Ramadan. We expect February CPI to be around 2.5%.
• Despite some improvement, inflation expectations remain elevated. Inertia remains strong, and demand conditions are not providing disinflationary support as expected. Smaller-than-expected rate cut in January and recent tightening steps in macroprudential measures appear to be taken to support disinflation.
• Higher-than-expected January print and increased weight of services pose upside risks to our year-end inflation forecast of 25% but the effects of recent policy measures should be monitored. The inflationary pressure will require the CBRT to be cautious as we already highlighted with our above-consensus policy rate expectation of 32% by year-end.

Geographies

Topics

Tags