Turkey: Inflation slows by base effect, before spending boom

Inflation slowed down relatively quickly due to the base effect from the exceptionally high realization of the previous year. December/end inflation came in at 1.2% m/m and 64.3% y/y, below expectations. Such indicators published by other institutions (ITO etc.) measure inflation at higher levels. Much of the slowdown in inflation is due to the correction of extraordinary realization in the last month of 2021, largely driven by the depreciation of the lira and rising import costs. We expect similar base-driven effects to continue for a few more months, bringing inflation down to 40% in the period leading up to the election. Despite this, we still need to talk about a public expenditure increase that can feed periodic price increases before the election.

Annual inflation in Turkey..

If we look at the sub-items of inflation; Many items in the main expenditure groups increased on a monthly basis. On the other hand, the main basic indicators and special comprehensive indicators declined on an annual basis from November. Annual food prices decreased to 77.9% from 102.6% in November, while energy prices decreased from 118% to 94.4% compared to the previous month.

Producer prices, one of the early indicators of inflation, decreased from 136% in November to 97.7% annually. Thus, double-digit rates were reached in PPI. Like headline inflation, the PPI was very volatile due to oil and commodities. While the slowdown in global costs and the stable exchange rate reduced the periodic realizations, the very high base effect also contributed to the sharp decline in December. The PPI-CPI pass-through, on the other hand, remained low throughout 2022, by a wide margin. The demand situation in the economy naturally affects price increases on the basis of cost implications. For this reason, demand-creating effects that trigger periodic price increases such as wage increases and early retirement should be taken into account in the first months of the year.

Core prices, which exclude variable items such as food and energy, rose 51.93%. On the core inflation side, there has been an explainable decline as the exchange rate has held steady for the past few months. The base effect will also have an impact on special comprehensive indicators in the coming months. Since it is an inflation indicator that excludes fluctuations in oil and commodity prices, real sticky inflation that reveals fundamental pricing behaviors will emerge here, and we expect a resilient outlook here after the base effect wears off.

The items that showed a higher increase than the headline inflation were health 5.91%, household goods 4.56%, housing 2.84%, restaurants and hotels 2.61%, entertainment and culture 2.47%, miscellaneous goods and services 2%, 41 and food and non-alcoholic beverages stand out with 1.86%.

We assume that economic policies in 2023 will remain the same until the elections. In this period, we will see that annual inflation rates will decrease mathematically with the base effect. For example, due to the periodic realization of 11.1% in the same period of the previous year, there will be a similar effect in January inflation and this will bring inflation to 50% levels. This decline will continue in the coming months, pushing inflation up to 40% in the period leading up to the election (unless there is an extraordinary price impact). We would like to remind you that these decreases will be entirely due to the base effect and will not be the result of a policy resulting from the decrease in inflation.

The factors that will lay the groundwork for this resilient outlook will be the budget burden of this injection, with the broad policies that will encourage spending and borrowing in the economy. Public expenditures and the demand effect in the economy will be due to factors such as early retirement, 55% minimum wage increase, CGF support for increasing costs to businesses, and cheap loan packages, especially housing. Due to such factors that can make prices sticky, we calculate an inflation outlook that is difficult to drop to 22.3%, which is the official expectation under these conditions, and we anticipate 43.3% inflation at the end of the year.

After the base effect on inflation wears off in the second half of the year, we think that different and normalized monetary policies will be necessary in the fight against inflation.

If we look from the perspective of the central bank; The interest rate cuts in the last few months of the year were intended to support the economic doctrine of President Mr. Recep Tayyip Erdoğan, based on the perspective of increasing investment and employment in an environment of low borrowing costs. In this context, the CBRT lowered the policy rate by 500 bps in total, bringing it to 9%. The rise in inflation was largely attributed to higher energy prices and a weak currency that drove up import costs. In terms of energy prices, the easing of global costs and the base effect were trusted, while the stability of the lira was ensured by subdued credit growth and reinforced financing resources. Assuming that such tools will not be used for a long time, we think that it will be necessary to pay attention to how much the economic policies after the election will emphasize the inflation focus.

Chairman of the CBRT, Mr. Şahap Kavcıoğlu will present the first Inflation Report of the year on January 26 and will send an open letter to the government this month as there has been an upward deviation from the inflation target.

Kaynak Enver Erkan / Tera Yatırım
Hibya Haber Ajansı