Türkiye | Hope Heats Up as Inflation Cools Down

Summary

Consumer prices rose by 1.37% m/m, lower than both our expectation and the consensus (1.5%), driving annual inflation down to 35.05%. Given the positive surprises of the last 3 months, we underline a high likelihood of a year-end consumer inflation below 30%.

Key points

• Key points:
• According to our calculations, seasonally adjusted (s.a.) monthly consumer inflation decelerated only marginally to 1.96% (down from 2.01% in May) due to the deterioration in services inflation, despite the slow-down in basic goods inflation on weakening domestic demand and managed levels of the currency. However, 3-month average trend improved further to 2.2% in June (vs. 2.4% previously).
• Services inflation (s.a) rose to 3.1% m/m in June (vs 2.7% previously) on a broad-based deterioration except for transportation, whereas basic goods inflation retreated to 1.4% m/m (vs. 1.9% m/m in May) due to a clearer deceleration in durable goods inflation.
• Food inflation stayed supportive (-0.3% m/m) with unrealized frost effects so far, and energy inflation was almost stable at 2% led by the fuel prices due to the recent geopolitical tension. Cost push factors get stronger but weaker domestic demand conditions might limit an additional pressure on sales prices, as signaled by the economic tendency survey.
• Monthly inflation in July could upsurge to a range of 2-2.5% due one-off effects such as the 24.6% hike in natural gas prices for households and other potential upward adjustments in administered prices. Nevertheless, most recent better than expected inflation realizations and ongoing tight monetary policy have increased the likelihood of a year-end consumer inflation below 30%, to which we will revise once we see how the July administered price hikes are finalized in the next days.
• As a result, we now evaluate a larger room of rate cuts for the Central Bank (CBRT). However, uncertainties about the scale of fiscal consolidation, food prices due to the impact from frost, strong inflation inertia, and high inflation expectations require the CBRT to remain prudent.

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