Turkey: Inflation over 80% and concerns about a new peak in the coming period

Annual inflation rose from 79.6% in July to 80.2% in August for the 15th consecutive month. Although slightly lower than the economists' median expectations of 81.2%, the high course of inflation continues. The price increase on a consumer basis was also 1.5% on a monthly basis. We estimate that inflation, which has accelerated less than expected, will still drive the movement above 80% in the coming months.

If we look at the sub-items of inflation; Although it is August, it is possible to say that price increases are progressing on a high basis. The core inflation index, which excludes the impact of volatile items such as food and energy, rose from 61.7% in July to 66.1% annually (a record for data going back to 2004). According to the B index, the core indicator rose from 68.5% to 72.5%, while services inflation continued to rise in August, reaching 54.3%. This shows that even if we remove all kinds of volatile items, inflation is still very high. It seems that this situation will continue for a while in current pricing trends. Producer prices, an early indicator of inflation, continued to grow by over 100% for the seventh consecutive month, reaching 143.8 percent year-on-year in August. Although the low increase of only 2.4% on a monthly basis brought a decrease from 144.6% in the previous month, early risks from producer inflation reveal that the upward effect on prices may continue in 2023.

While annual price increases in food and non-alcoholic beverages were 94.7% compared to the previous month, they became 90.3% in August. Although the monthly increase rate is 0.85% on the food side, we observe that the price increase effect on the unprocessed food side outweighs despite the summer months. As the item that the consumer feels the most, we observe that the effect of the annual increase in food continues and the effect of abundant supply and price decreases in summer months, as in the last few years, were not very effective. We think that the high impact on the food side will accelerate in the autumn-winter months. Energy inflation was also 121.7% in August compared to the previous year.

The items that increased higher than the headline inflation were health 7.01%, education 6.55%, miscellaneous goods and services 3.86%, household goods 3.35%, entertainment and culture 3.34%, restaurants and hotels 3.31%. Significant increases are seen in health and education, which will include higher increases as September is the period when these items show their main seasonal effects. Istanbul inflation, announced by the ITO, showed that the price increase in August was 99.9% compared to the previous year.

Turkey has the world's deepest negative interest rates when adjusted for inflation. The lira has tumbled 27% against the dollar this year, performing the worst in emerging markets. In this context, besides the uncontrollability on inflation, there seems to be a significant deviation from the depreciation of the lira. The policy makers' approach, on the other hand, was that the increase in inflation was mostly on the axis of the Russian occupation of Ukraine and the resulting global increase in food and commodity costs, but that the price increases were temporary. For this reason, we observe a perspective that does not directly address inflation as the policy implementation of the Central Bank, and we observe that policies with a direct growth target are implemented. The Turkish economy showed rapid growth in the first two quarters, but we believe that the factors that could put a brake on the economy, especially the risk of recession in Europe, and the toxic effects of inflation over time pose a slowdown threat in the future.

According to a new three-year plan published in the Official Gazette on Sunday, the government has raised its forecast for price growth in 2022 to 65% – from 9.8% previously – and predicts slowing to just 24.9% next year. Inflation is not expected to be below 10% until 2025. Although slightly adjusted according to my other MTP forecasts, we think that 65% inflation at the end of the year will be difficult, and that inflation will be above 70% at the end of the year after the last electricity and natural gas hikes. The continuing increase in inflation, the rigid course of services prices and the price risks that may arise from global supply shocks cause us to put our inflation forecasts on cautious ground. This expectation is decisive in our perspective, as we do not expect a policy move that will directly reduce inflation.

Natural gas and electricity hikes will have a direct impact on the CPI and will have a monthly impact on producer prices. Therefore, even if it seems low this month, inflation will rise even higher in September and October, and if the exchange rate rises, it may exceed the current projections. In December, inflation will decrease due to the base effect, but we will continue to see the effects of periodic price increases excluding the base effect. We consider the forecast for the next year, which predicts a decrease to the 25% band, as optimistic within the scope of current paths and risks. The August Market Participants Survey reveals that inflation is expected by the real sector and market actors to be over 24% in the next two years.

If we look from the perspective of the central bank; Monetary policy is not used to fight inflation. Concerned about 'some loss of momentum', the central bank lowered its benchmark rate by 100 basis points to 13% last month. The perspective that prioritizes economic growth and cheap credit poses risks to the value and price stability of the lira. It is seen that policies that prioritize growth will prolong the fight against inflation. President Mr. Recep Tayyip Erdogan had asked for 'a little patience and more support' last week, saying inflation would start to drop at the start of the new year.

As a result; We prioritize inflation risks due to reasons such as rising supply shocks, the instability of the lira, policies aimed at growth, economic incentives that may increase before the election, and cheap credit growth that is desired to be increased with low interest rates. We think that growth indicators may suffer with the growing economic risks and the expected recession in Europe.

Kaynak:Tera Yatırım-Enver Erkan
Hibya Haber Ajansı