Türkiye | Encouraging surprises, underlying strains in July CPI

Summary

Consumer prices rose by 2.06% m/m, lower than both consensus (2.4%) and our expectation (2.5%), driving annual inflation down to 33.5%. Considering unanchored inflation expectations, high services inertia and upward pressure on the food inflation going forward, we expect the year-end inflation to reach 30%.

Key points

• Key points:
• According to our calculations, seasonally adjusted (s.a.) monthly consumer inflation considerably accelerated with 2.6% m/m (up from 2.0% in June). When excluding the impact of one off factors (s.a. 0.9pp) stemming from administered prices, seasonally adjusted monthly consumer inflation stayed below 2%.
• While the deterioration in seasonal adjusted services inflation continued, but at least not broad based, the improvement in basic goods inflation was marginal despite the support from clothing inflation. Hence, core inflation remained steady at around 2.2% (almost the same in the last 3 months).
• Despite the acceleration in processed food inflation, the deflation in the fresh fruit and vegetable prices and other unprocessed food supported the improvement in food inflation. Furthermore, cost push factors remained limited.
• Weaker domestic demand contributes to disinflation; however, risks to the inflation outlook remain elevated due to unanchored high inflation expectations, backward-looking pricing behavior, limited support from fiscal policy so far, and ongoing uncertainties surrounding energy and food prices driven by geopolitical risks and the impact of frost.
• Recent monthly inflation figures were lower than expected, creating downside risk to our near term inflation forecasts. Nevertheless, persistent uncertainties surrounding the inflation outlook keep us prudent. Therefore, assuming adequate real interest levels via gradual policy rate cuts, we have revised downside our year end inflation forecast to 30% from 31%.

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