Turkish Economy: May Inflation
Early signs that decisive dis-inflation trend to start in 2018
At 0,45% monthly CPI inflation announced in line with market expectations. Annual CPI inflation decelerated to 11,7% while core inflation stayed flat at 9,4% YoY. PPI inflation visibly slowed down to 15,3% YoY recording 0,52% MoM.
- Momentum indicators show that inflationary pressures are abating markedly (cover figure).
- Sources of inflation i.e. fiscal measures, currency, and energy prices to phase out throughout the year.
- Input related cost pressures diminished in line with tendency surveys and commodity price developments.
- Food inflation still highest in last 10 years with a probable correction in summer months to drift headline towards single digits.
- Base-effects may play tricks during fall season in terms of face value readings when annual inflation will be climbing again.
- Decisive and lasting dis-inflation trend to start in 2018.
Unprocessed food prices have decreased by 0,74% MoM. Still annual food inflation accelerated further to 17,4% due to base effects (Figure 1). Annual food inflation has deviated significantly from its trend. It usually tends to revert itself which may allow for a more visible decline in headline inflation rate in summer months. Current reading comes next to 17,9% recorded back in October 2010, the highest level in the last decade. Not surprisingly year to date food inflation at 10,2% points to the highest level in last 10 years (Figure 2).
PPI and FX Pass-through
Producer price inflation slowed to 0,52% MoM. After reaching 3,98% in January factory gate inflation was coming down. With oil prices stabilizing at about USD 50 per barrel following OPEC deal commodity related price pressures have declined. On top of that stability in Turkish Lira bars import prices from rising. In recent tendency surveys producers were signaling their reluctance on further price adjustments. Producer prices tend to lead consumer prices despite higher volatility. PPI inflation turning from about 16% can be considered as another sign that inflationary pressures are loosing steam.
This year high inflation arose due to some specific conditions i.e. fiscal measures, currency depreciation, and energy prices. We expect these drivers to phase out throughout the year. Although inflationary pressures are abating base effects will prevent inflation from entering a visible dis-inflation trend. We expect that trend to occur in 2018 starting in December (Figure 3).