Turkey: After the peak inflation

Inflation probably hit a 24-year high in october. After the annual peak in October inflation, an annual inflation rate lower than the peak will be seen in November inflation, which will be announced at the beginning of next week. The decline in the annual inflation rate will be a little more pronounced in the next few months. However, it is difficult to think that this effect will indicate a disinflationary process other than the base effect. In this context, we expect the headline CPI reading to slow down from 85.5% in the previous month to 82.7% in November.

Inflation is on a high and widespread course. Therefore, it would not be correct to read the pullback in annual inflation as a full disinflation effect. Growth-origin monetary and fiscal policies still cause high price increases. The lower readings in inflation are due to the extremely high price increases in the same period last year, which is closer to normal this year. This does not show that the problem of high and broad-based inflation has been overcome. Of course, this pricing and deterioration in expectations, which creates inertia in inflation, is the main risk that will cause the decline in inflation to occur slower and later than expected.

Comparison of main spending groups and headline CPI… Inflation remains high on a broad base… Source: Bloomberg, TurkStat, Tera Yatırım

We see inflation as widespread, evaluate it and consider it to become permanent as the most important risk. On the basis of CPI, the prices of almost no products have decreased in recent months. Price increases in key fundamentals are at their highest levels in data dating back to 2004, showing increased stickiness.

If we look at the leading indicators in terms of inflation;

According to TÜRK-İŞ data, the change in 'food inflation' in November 2022 is as follows: The increase in the minimum amount of expenditure for 'food' by a family of four living in Ankara was 4.87% compared to the previous month. The eleven-month change rate was 90.02%. As of the last twelve months, the rate of increase has been calculated as 137.38%.

According to ITO's November data, retail prices in Istanbul increased by 3.10% on a monthly basis and by 105.55% on an annual basis. Compared to the previous month in retail prices; An increase of 5.31% was observed in household goods expenditures, 4.52% in food expenditures, 3.84% in health and personal care expenditures, 1.53% in culture and entertainment expenditures, 0.88% in housing expenditures and 0.82% in clothing expenditures. Istanbul's October inflation was recorded as 108.8%.

Inflation, which we think has passed its peak, will lose momentum on an annual basis after this period due to the base effect of the high realizations stemming from the lira crisis at the end of 2021 and the energy crisis in the first half of 2022. Compared to the 65.2% projection announced by the CBRT on October 27, we see the year-end inflation as 74.8%. We calculate inflation, which we expect to decline to 64.5% with the base effect, as 42.3% by the end of next year (TCMB 2023 forecast is 22.3%). These projections correlate with our projection of a slower inflation decline.

If we look from the point of view of the CBRT; Despite high inflation, the Central Bank reduced interest rates by 500 basis points in its last four meetings. With the latest rate cut, the central bank announced the end of the easing cycle for now. In the MPC summary, it was noted that the effects of exchange rate developments on inflation were examined and it was stated that the monetary policy stance will be determined with a cautious approach, focusing on achieving the sustainable price stability target, taking into account the source, permanence of the risks to the inflation outlook and the extent to which they can be controlled by monetary policy.

We think that after the slowdown in inflation due to the base effect, the disinflation area will remain limited and we think that the tight inflation outlook will continue.

Kaynak: Tera Yatırım-Enver Erkan
Hibya Haber Ajansı