Türkiye: The effect of natural gas on inflation in May, orthodox policy in the long run

In May, inflation was close to zero on a monthly basis, thanks to the effect of free natural gas use on the calculations. Consumer prices increased by 39.6% year-on-year (April: 43.7%), while monthly prices increased by 0.04% (Dinamik Yatırım expectation: 0.1% m/m, 39.7% y/y).

The Turkish Statistical Institute announced that it would price the natural gas use as “0” in May due to the 1-month free use of natural gas and that the inflation reading in May is expected to drop sharply due to this pricing. We would like to remind you that in the June 2023-May 2024 period, up to 25m3 of natural gas will be free of charge and inflation is expected to rise again towards the end of the year. Since the natural gas consumption in winter will be much higher than in May and the unit price will probably increase, the bills will increase again in winter compared to the previous year. This means that the positive inflation effect can be erased after the summer has passed.

As of the new data, even if orthodox policies are to be adopted, we see our inflation expectation for the end of the year as 41.4%.

Annual inflation in Türkiye… Source: Bloomberg, TURKSTAT, Dinamik Yatırım

If we look at the sub-items of inflation; Many items in the main expenditure groups increased on a monthly basis. Core inflation, which excludes variable items such as energy and food, rose to 46.6% year-on-year from 45.5% in April. While the headline figure is on the decline, core inflation remains warm, a sign that price pressures remain high. On an annual basis, food inflation declined from 53.9% to 52.5%. Food and non-alcoholic beverages, which make up a quarter of the inflation basket, slowed down compared to the previous month with an increase of 0.7% on a monthly basis. Producer prices, one of the early indicators of inflation, decreased to 40.8% on an annual basis from 52.1% in April.

The items that showed a higher increase than the headline inflation were clothing and footwear 9.85%, restaurants and hotels 7.10%, education 5.14%, entertainment and culture 3.62%, transportation 1.88%, health 1.80%, miscellaneous goods and services 1.76%, communication with 1.72%, household goods with 0.99%, food and non-alcoholic beverages with 0.71% and alcoholic beverages and tobacco stand out with 0.28%. The only group that decreased in May was housing with 13.79%, which indicates that the biggest contribution to inflation in May came from the use of free natural gas.

Former Finance Minister Mr. Mehmet Şimşek became the head of the Ministry of Treasury and Finance. The fact that Mr. Şimşek is the Minister of Treasury and Finance, Mr. Cevdet Yılmaz is also the Vice President may pave the way for the realization of key moves for the solution of short-term problems and the transition to a strong economy, along with Orthodox policies, for the coming period. As a matter of fact, at the weekend, Minister Şimşek announced that he would return to a “rational economy” and added that Turkey would have to significantly change its economic policy in order to bring down high inflation. Şimşek said, "Price stability will be our main target, and it is vital for our country to reduce inflation to single digits in the medium term."

If we look from the point of view of the CBRT; It is understood that the interest rate policy will be used as the main tool together with Mr. Şimşek's orthodox policy rhetoric and a significant tightening will be made. Liraising regulations on banks will be eased, and the exchange rate will be left to move freely in line with the needs of the exporter. This means that we will see some upward movement in the exchange rate, even if orthodox policies are adopted. The tightening in credits will reduce consumption, and since consumption-based imports will decrease, a periodical current account surplus will be given with a periodic economic slowdown. In this period, in order to prevent the commercial life from being adversely affected by monetary tightening, targeted incentives can be applied by separating consumer and commercial loans in loans.

Within the short-term implications, an increase in the exchange rate will continue to keep inflation high, but the positive reflection of reassuring policies on the risk premium may also positively affect the commercial climate, foreign direct investment and capital inflows. The decline in energy prices worldwide is an important plus for us, and we will be in a position to have a current account surplus when consumption is also reduced. In order for this to become permanent, recent domestic resources and energy investments need to reduce the foreign-dependent structure. Increasing value-added production with domestic resources will put exports in a more competitive position and increase investment attractiveness. Providing continuous investment and capital inflows with reassuring policies also supports stabilization in terms of USDTRY and EURTRY.

Kaynak Enver Erkan – Dinamik Menkul

Hibya Haber Ajansı