Turkey: Onset of base effect, slower price hikes

CPI inflation came to 84.4% in November (expected: 84.8%, Tera: 82.7%), declining from the peak of 85.5% recorded in October. The annual fall in inflation in November seems to be a start, as strong base effects will prevail after December. We expect inflation to decrease in the first few months of 2023, as similar base effects will prevail in the coming periods. We think that the inflation rate will be slightly below the 75% band in December, mainly due to the high levels in the same period of the previous year (December 2021 periodic inflation: 13.6%).

Comparison of headline and core CPI and CBRT policy rate… Source: CBRT, TURKSTAT, Bloomberg, Tera Yatırım

If we look at the sub-items of inflation; Many items in the main expenditure groups increased on a monthly basis. On the other hand, many of the main key indicators and special comprehensive indicators declined from the peak in October on an annual basis. While food inflation rose from 99.1% to 102.6% on an annual basis, it was the item with the highest increase on a monthly basis. When we look at core inflation, the C indicator, which excludes energy, food and non-alcoholic beverages, alcoholic beverages, tobacco products and gold, was 68.9% in November. While the slowdown in commodity prices and the stagnation in exchange rates eased the producer cost pressure compared to previous months, PPI increased by 0.7% on a monthly basis. Thus, the PPI decreased from 157.7% to 136% on an annual basis.

Food and non-alcoholic beverages stand out with 5.75%, alcoholic beverages and tobacco with 3.19%, restaurants and hotels with 3.18% and household goods with 3.01% as items that showed a higher increase than headline inflation. The only group that decreased in November was clothing and shoes with 1.42%.

Comparison of main spending groups and headline CPI… Source: Bloomberg, TurkStat, Tera Yatırım

After the peak in October inflation, a slight decline is observed in November inflation due to the base effect. Annual inflation recorded its first decline in 1.5 years and it is likely that the decline will continue in the coming months due to the base effect created by the excessive price increases in the same period of last year. After that, we will see the methodology effect on inflation rates for a while. Depending on the December 2021 inflation formation, the inflation that will take place in December 2022 will help to reduce the annual rate noticeably. We estimate that this base effect will have an impact of around 10 percentage points on annual inflation, which will likely allow the year to close at or below 75%. In the seasonally adjusted CPI series, the December 2021 rate appears to be 13.58% due to the extraordinary lira depreciation in that period. Adding the margin of variance, we arrive at the current output, as the monthly price increases in the conjugate period will be more in line with our long-term averages and will not exceed this one-off realization in the same period last year.

Annual inflation in Turkey… Source: Bloomberg, TURKSTAT, Tera Yatırım

Meanwhile, the inertia effect resulting from price behavior will cause periodic price increases to remain high. After eliminating the base effect, this cannot be considered as a real fall in inflation. Reducing inflation will require faith in the implementation of anti-inflationary policies. Instead, we have a loose monetary policy because the priority is growth, so inflation will continue to be a problem. A possible increase in food, energy or foreign exchange will be effective in posing an upward risk to inflation. Even if monthly price increases remain positive, annual inflation has started to slow down and will continue to slow down for a while in 2023 due to the high levels in the base periods, which is a function of the lira depreciation in 2021 and the 2022 energy crisis. But slower inflation does not mean that the eroding price increases that are eroding incomes will stop. As people enter the market to meet their basic needs, they will continue to face higher costs.

If we look from the perspective of the central bank; In the last four meetings, the policy rate was reduced by 500 bps in total, bringing it to single digits at 9%. These moves are in line with the growth-oriented policies of the economic administration and for this reason, a relaxation perspective has been adopted in monetary policy for a while. Although the easing cycle was declared to be over after the last 150 bps rate cut tranche, the growth-oriented approach was continued, and the fight against inflation was transferred to external developments, base effect, liraization strategy and fine-tuned policy steps. We think that the current expansionary fiscal and credit policies before the general and parliamentary elections to be held in mid-2023 risk weakening the lira and increasing inflationary pressures. The next Central Bank meeting is on December 22. We do not expect any change, as we foresee that interest rates will remain constant for a while, within the framework of the clear guidance in the November MPC text.

Kaynak: Tera Yatırım-Enver Erkan
Hibya Haber Ajansı