Türkiye: The last CPI decrease

TurkStat will announce June inflation data on July 5 (tomorrow). As of summer, we will see that the inflation pass-through of exchange rates increases with the deactivation of the base effect and additional factors. This situation will manifest itself especially in imported goods and input categories, and will bring upward price pressure on fuel, energy input and durable consumer goods.

Although the prices of services are rigid due to demand, the constraints that the tight monetary policy will impose on consumption may create some balancing. We have to evaluate the inflation effects of the minimum wage increase on demand and operating costs as of July. We consider the demand-driven effects as lagged and see the short-term effects on inflation as upwards at exchange rates.

Based on the factors we have mentioned, we consider that inflation, which we expect to realize 2.5% monthly and decline to 36.3% on an annual basis, may gain momentum again in the second half of the year. Our lower than consensus expectation is based on partial reductions in some public services (the natural gas effect, which flattened May inflation). We know that the Central Bank will implement a tighter monetary policy for the remainder of the year, but we see the short-term inflation outlook as upwards due to the inflationary pressures stemming from the weakening lira and the expectation that the fiscal policies to be implemented by the government will not tighten before the local elections.

Turkish Inflation Will Reverse in the 2nd Half

The lira depreciated 20.3% against the dollar in June, showing the most significant weakening in emerging market currencies. This was due to the effect of a shift to a traditional policy that heavily deregulated the lira and adopted a non-use of public banks and reserves to keep the exchange rate stable. The exchange rate pass-through will therefore increase, because the cost leg of weakening the lira is effective for inflation. Therefore, we consider that the high impact of PPI and CPI arising from imported inputs and goods will continue.

Another cost pressure is rising labor costs. Of course, rising labor costs also have a demand and budget deficit effect. Therefore, we consider factors such as minimum wage hike, pension increases, civil servant salaries from a multidimensional perspective. The direct operating costs effect of the last minimum wage increase may trigger the effect of rapid price increases. However, before and after the election, 0wWe see the effect of public expenditure as high, in terms of President Mr. Recep Tayyip Erdoğan's promise to raise civil servant salaries and pensions. Therefore, the budget deficit may have an upward effect on inflation in the second half of the year through the government's pricing and taxation policies.

If we look from the point of view of the CBRT; We do not expect the tightening cycle to have a downward impact on inflation in the near term. Factors such as the government's lax fiscal policies, increasing exchange rates and the persistence of the transitional effects of the inflationary environment will delay the decline in inflation. We think that the fall in inflation as of June will not be sustained in the following months. In the second half of the year, the factors mentioned above will affect the movement of inflation upwards. In the light of market consensus and our forecasts, we expect year-end inflation in the 40-45% band with an upward risk of deviation.

Kaynak Enver Erkan / Dinamik Yatırım 

Hibya Haber Ajansı