Türkiye | Temporary pause in disinflation with new risks

Summary

Consumer prices rose by 2.96% m/m in February, bringing annual inflation to 31.5% and marking a pause in disinflation. The recent energy price shock and persistent price pressures create upside risks to our 25% year-end forecast, though higher real rates and a potential fuel pricing mechanism could help limit these risks.

Key points

• Key points:
• Headline inflation was pushed up by elevated food prices, partly reflecting Ramadan effects, but softer core goods inflation limited the deterioration. Seasonally adjusted inflation eased only marginally (to 2.75% from 2.84%, by our estimates), as services inflation remained elevated alongside persistent food price pressures.
• Core inflation (s.a.) decelerated to near-term low levels, driven by an easing in basic goods inflation (0.5% s.a.), which had picked up in Jan26 due to broad price adjustments. In contrast, services inflation (2.7% s.a.) showed no signs of improvement.
• All six underlying inflation indicators, with the exception of Core-C, signal a persistently strong trend, with no clear improvement. Median inflation, closely monitored by the CBRT, edged up to 2.2%, hovering around levels seen in early last year, though it showed a limited improvement excluding food. Additionally, highly unanchored inflation expectations and resilient domestic demand remain key challenging factors.
• Rising energy costs amid the conflict in the Middle East pose upside risks to inflation. A 10% increase in energy prices could add roughly 1–1.5pp to headline inflation over a one-year horizon.
• We calculate a nearly 1.5pp impact on our year-end 2026 inflation forecast, led by the recent energy price shock and persistent inflation dynamics. However, the timely reaction of the CBRT by raising real rates combined with the potential implementation of a sliding-scale system for fuel prices could offset part of this pressure. At this stage, we maintain our 25% year-end inflation forecast, which we will revise in light of geopolitical developments and additional policy actions, if needed.

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