Turkey: Inflation increases in the 7th month due to weak TRY effect

Consumer prices in Turkey increased by 1.68% in April, while annual inflation was 17.14%. Our expectation was for a monthly inflation of 1.3% and an annual inflation rate of 16.7%. Inflation continued to rise in April from 16.2% in March, due to the ongoing weakness of TRY and the rise in global energy prices. As it will be remembered last year, the commodity group, which fell to very low levels due to the pandemic effect of demand collapse in the economy, plays a role in a base effect transferred from last year as well as the seasonal effect with the price increases this year.

If we look at the sub-items of inflation; An increase is observed in almost all of the main expenditure groups. Indicator C, which excludes volatile items such as food, energy and gold, rose from 16.9% in March to 17.8% in April on an annual basis. The high rise in core inflation is a sign of inflationary pressure on core goods. Among the items that increased higher than the headline inflation, clothing and shoes stand out with 7.57%, food and non-alcoholic beverages with 2.13%, education 2.09% and miscellaneous goods and services 1.89%. Although the annual inflation in the food item, which constitutes almost a quarter of the inflation basket, decreased from last month’s 17.4% to 17%, it continues to be above the assumption of the Central Bank. The Central Bank revised its year-end food inflation expectation to 13% in the last Inflation Report. As a reflection of high oil prices in energy inflation, there is an annual increase from 12.4% to 18.4%. The increase in energy costs is important as it can have a spillover effect on inflation.

April inflation was normally expected to be the high of this year. There is a chance that inflation will regress in the next period, with the base effect from last year. Especially in the commodity markets, the effect of extreme prices that have been formed in the recent period may create some temporality. However; It is necessary to mention a few obvious risk factors for the coming months. The effect of international markets on domestic pricing continues. Import costs are not only affected by the exchange rate, even the exchange rate has a little additional effect nowadays. The increase in raw material prices and the effect coming from freight also affect the high pricing of the goods in the process of transferring to the domestic market. Cumulative exchange rate pass-through is likely to increase inflationary pressure as TRY becomes devalued. Individuals demanding more foreign exchange in order to avoid inflation and active risk factors seen by international investors may cause the continuation of this devaluation. For this reason, it is necessary to consider the future effects, not the past, in terms of exchange rate. Especially in an environment where futures transactions are seen intensely in import-export and commodity trade, pricing will not be in line with a stronger or stable TRY.

PPI increased to 35.2% as of April. Monthly increase in producer inflation is at the level of 4.34%. Due to the PPI increase, which is quite above the headline CPI, the effect of high cost undertaking continues to increase. The gap between PPI and CPI has exceeded 18 points. In such an outlook, it is not possible to talk about a permanent and sustainable decline in inflation. However, we need a permanent decrease in all its indicators rather than a periodic inflation decrease in loosening monetary measures. Domestic demand, which will revive after the end of the closing period, may activate the price hike factor more rapidly. In this environment, it will be possible to reflect the increasing costs on consumer prices with a higher coefficient.

The Central Bank will hold an interest meeting on Thursday, May 6. We do not expect a change in the policy, as the guidance regarding the application of interest rates above the current and expected inflation, which was reiterated by Mr. Kavcıoğlu in the last Inflation Report presentation, continues. We do not see the possibility of additional monetary tightening in the game due to the more optimistic inflation forecasts of the Central Bank for the upcoming period. The Central Bank does not have any space of ​​monetary easing yet, in terms of interest rate application above inflation, that continues to increase. In this context, we expect the interest rate to remain constant at the May 6 MPC meeting.

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