April Inflation:"«Plateau» rather than «peak» describes the path ahead"

Turkish Economy: April Inflation

«Plateau» rather than «peak» describes the path ahead

At 1,3% monthly CPI inflation announced in line with market expectations. Annual CPI inflation accelerated to 11,9% while core inflation slowed down to 9,4%. PPI inflation further slowed down to 0,76% MoM.

Key Take-aways:

  • Unprocessed food inflation at 16,1% YoY main reason behind high headline figure.
  • “Plateau” rather than “peak” may better describe the path ahead.
  • Core CPI suggests that pass-through impact quicker rather than stronger.
  • Central bank to focus on “trend”-inflation keeping tight monetary policy intact.
  • Lower oil prices and currency stability indicate improvement in energy inflation.
  • Input related price pressures declined with PPI inflation at 0,76% MoM close to its longer term average of 0,78%.

Food Inflation

Unprocessed food prices have increased by 1,2% MoM causing annual food inflation to rise sharply. At 16,1% YoY food inflation hovers well above its longer term average of 10% (Figure 1). After a depressed period in food inflation prices have shot up to the upside. Due to diplomatic developments with Russia agricultural production shows volatility causing erratic price movements. Food committee measures may help limit price increases in agricultural products. With a weight of 20,2% in consumer basket unprocessed food inflation contributed by 3,25% to annual headline inflation.

The FX shock that have started with Lira depreciation back in November was completed in February accumulating up to a 20,6% depreciation. Generally, as a rule of thumb 15% is an accepted level of pass-through inflation in Turkey. Under such a scenario FX related developments should add about 3% to price levels in a year’s time. Probably due to inventory depletion in fourth quarter last year producers had to work with input costs at current market prices.

FX Pass-through

That was the time when commodity prices rose. Therefore the pass-through may have been felt quicker with a steep acceleration in core inflation. Core inflation reached 9,5% in March up from 7% in November (beginning of FX shock). Due to accumulation and enduring effect of the shock inflation may hover at higher levels till the shock starts to dissipate. We expect the currency shock to start dissipating in October. That may cause trend-inflation to keep flat at about current levels till fourth quarter of the year (Figures 2 and 3).

Barring volatility in headline central bank indicated during inflation report briefing that they are focusing on the trend of inflation. Because it’s a probability that a pullback in headline inflation may arise in summer months due to a reversion in food prices. Central bank also thinks that there is about 1,5% impact arising from fiscal measures initiated at the end of 2016.

Pass-through (cont’d)

Tax increases can be considered another reason behind high level of headline inflation. Next to currency, fiscal policy related effects will also dissipate gradually throughout the year. Therefore tight policy stance should be preserved till core inflation starts a clear downward trend in fourth quarter of the year.

Breaking down the inflation to its components; services continue to show a persistent pattern. Services inflation climbed to 8,8% YoY. Non-durables inflation which mainly consists of food items accelerated to 14% YoY (Figure 4). Almost 1/3rd of the inflation basket consists of services related consumption. Persistently high level of services inflation creates a burden against dis-inflation. Semi-durables and durables are more currency sensitive than services or non-durables. Looking at their trend, durables continue their accent while as semi-durables which is mainly energy fell back in April. Durables inflation was recorded at 12%. However their weight in the inflation basket is relatively low with 13% causing a very tine effect on the headline level.

Components and services

Semi-durables inflation fell down to 5,5% from the peak at 7,7% reached in March. That development can be explained by oil prices falling back to USD 50 per barrel level and a more stable currency (Figure 5).

Producer prices

PPI inflation slowed down to 0,76% MoM after reaching 4% MoM in January. Lower commodity prices, a more stable currency can indicate input price pressures alleviating in the short term (Figure 6).

PPI inflation slowed down to 0,76% MoM after reaching 4% MoM in January. Lower commodity prices, a more stable currency can indicate input price pressures alleviating in the short term (Figure 6). Long term average of monthly PPI inflation stands at 0,78%. Similar to future core inflation path PPI inflation may follow a plateau till last quarter of the year. There is a slim probability that PPI inflation may have peaked in April at 16,4% YoY. That will depend on the future input price developments. Depending on price pressures we may see another peak in September at about 18%. Central bank respondents of the business tendency survey also point to slower factory gate inflation down the road (Figure 7).

Now we are watching future evolution of;

1. Services inflation, and
2. Food prices.