July Inflation: Wouldn’t accept the gambit

Turkish Economy: July Inflation

Wouldn’t accept the gambit

CPI increased by 0,15% MoM in line with market expectation of an 0,17% increase. Annual CPI inflation further decelerated to single digits at 9,79%. However PPI inflation rose by 0,72% MoM – slightly below its historic average of 0,78% –  moving the annual figure up to 15,5%. In tandem with PPI inflation, core inflation rose to 9,6% YoY.

Key Take-aways:

  • As widely expected inflation has fallen to single digits in July, albeit for a very brief period of time.
  • Fallen from 14,6% July unprocessed food inflation of 9,9% right at its historic average.
  • A vivid economy hinders trend inflation from slowing, as manifested in PPI and core inflation metrics (cover graph).
  • Future path of headline inflation signals acceleration to double digits till November – core to advance sideways.

Food Inflation

After peaking in May with 17,4% food inflation has been behaving according to its mean-reversion pattern (Figure 1). Historic average of the series stands at 10%. In July, unprocessed food inflation eased to 9,9%.

Food inflation has the highest weight in the basket with 21,8%. Additionally it’s one of the most volatile components of the inflation. Therefore this huge volatility since November of last month created a significant variation in the headline figure. As food inflation has accelerated from its nadir of 3,3% in November to its peak of 17,4% in May, headline inflation has advanced to double digits.

In terms of seasonal pattern, food inflation closes the year at 9% based on historical average. Since food inflation started 2017 on a fast-track it’s probable that it may end at a higher level. Therefore central bank has increased its forecast to 10% from its previous 9%. Such a scenario means that food inflation behaves smooth in the remainder of the year.

PPI and Trend Inflation

Despite volatility in headline inflation, trend inflation still hovers at elevated levels – in line with expectations. We  hold on to our view that dis-inflation trend will not start before December. We may also see a higher second peak in PPI inflation around the months of September or October at about 17%.

In central bank’s tendency survey factory gate prices rose for the first time in six months (Figure 2). Current level of the diffusion index wouldn’t distort pricing behavior. On the other hand strong house-hold demand and the end of consumption tax incentive for domestic appliances in sight may be attributed for higher durable goods inflation in the consumer basket. That in turn may have pressured the core metric with it.

In a chess game one accepts a gambit under normal conditions. There are certain exceptions to this strategy. This month’s blip in inflation seems very familiar standing out as an exception. Central bank will not accept it and keep playing her own tight game till a lasting dis-inflationary trend appears.