Turkey: Inflation probably peaks, decline to be slow

Consumer price inflation continued to rise in October, increasing by 3.54% on a periodic basis (in line with the market expectation, below our expectation of 4.6%), and on an annual basis it reached the level of 85.51% in October from 83.45% in September. We consider this rate, which is 17 times higher than the Central Bank’s medium-term target of 5%, as the possible peak in this year and 24-year historical series. In addition to the base effects, if the unexpected adverse wind effect is not observed, inflation will start to decrease in annual rates in the coming months. In this context, we see the inflation rate as 75.7% at the end of the year, based on the latest realizations.

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; All items in the main expenditure groups increased on a monthly basis. Price increases in food products nearly doubled at 99.1% during the year, while transportation costs increased by 117.2%. When we look at the core inflation basis, it is seen that there are broad-based increases confirming the rigidity in all indicators. The B indicator, which excludes unprocessed food, energy, alcoholic beverages, tobacco and gold, increased by 77% annually, while the C indicator, which excludes energy, food and non-alcoholic beverages, alcoholic beverages, tobacco products and gold, rose from 68.1% to 70.5%

On the PPI side, commodity prices are in a regression with the possibility of shrinkage in demand in the world, and this may provide relief on the costs side. We saw declines in oil and metal prices due to shifts and slowdowns in demand as the war continued. If there are no price attacks again, with the help of base effects that will work, we can see a regression to double digits in this area in 2023. We think that the decline in PPI can be realized more easily compared to CPI.

As the items that showed a higher increase than the headline inflation, clothing and shoes stood out with 8.34%, food and non-alcoholic beverages with 5.09%, and household goods with 4.38%. In other groups with high weight, housing increased by 2.57% and transportation by 2.19%, monthly. The lowest monthly increase occurred in the education group with 0.36%.

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

While inflation has likely peaked, core inflation figures are still very high, suggesting that it may take a long time for underlying trends to recover. The fact that the PPI is at the level of 157.7% reveals that not all of the producer costs have been reflected in the prices yet. The current picture shows the partial change in inflation due to the base effect in the coming periods, but let us remind you that the expectation band will increase in case of any depreciation in TL. This can have a significant impact on inflation and the decline in inflation may be very slow due to core inflation trends. We think that the CPI will slow down more gradually than the official expectations and that the most important thing is core inflation and its rigidity.

On the food side, supply-related risks on the agriculture side are still at the forefront. For broad optimism on this issue, the war conditions in Russia and Ukraine should disappear in the first place. We seem to be seeing positive developments again regarding the opening of the grain corridor, but the situation on this side is still very fragile. It should be noted that the war is not the only problem on the food side, but the recent loss of crops due to climate and environmental conditions has also been an important factor and has increased global food prices. Of course, the depreciation of TL in the domestic market creates an extra cost element in agricultural inputs.

If there is no significant decrease in demand, the negative trend in inflation may continue on an international basis. In a very short time, inflation rates have increased rapidly in the world and in Turkey, and the inflation conjuncture can create a self-creating cycle as it directly disrupts pricing and consumer behavior. This shows that movements in the direction of deterioration can occur much more easily. Of course, this is an issue that needs to be addressed separately, and monetary authorities around the world want to sharply control consumer behavior by increasing interest rates.

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

If we look from the perspective of the central bank; Although inflation continued to accelerate exponentially, the CBRT cut interest rates by 350 basis points in its last three meetings. When we adjust for October inflation, which is 85.5% with the policy rate of 10.5%, we reach a real rate of -75%, which is the lowest and non-standard band among our emerging market peers. President Mr. Recep Tayyip Erdogan aims for more growth in the economy, national income, employment and production. Similarly, the Central Bank is signaling another 150 basis points of rate cut for its November meeting.

Although the inflation rates in the world have increased in a very short time, the inflation rates spoken for Turkey were around 20% at the end of last year, but accelerated in the following months with the depreciation of the lira that started after the previous 500 basis point easing cycle. At the moment, we are talking about inflation rates above 85%. We think that the CBRT’s ongoing cycle of rate cuts may continue to weaken the lira and feed inflation. On the other hand, we expect the current perspective and growth-oriented approach to be preserved in monetary and fiscal policies, which we expect to remain loose as we move towards the elections.

Kaynak: Tera Yatırım-Enver Erkan
Hibya Haber Ajansı