September CPI:"Peak zone"

Turkish Economy: September CPI

Peak zone

CPI increased by 0,65% MoM in line with market expectation of an 0,63% increase. Annual CPI inflation accelerated to 11,2%. However PPI inflation surprised downside by rising only 0,24% MoM – significantly below its historic average of 0,78% and market expectation of 1% – keeping the annual figure flat at 16,3%. In contrast with PPI inflation, core inflation reached 11% YoY – highest since 2004.

Key Take-aways:

  • Long awaited peak of inflation finally in sight – both CPI and PPI are about to peak.
  • After a «plateau» period, Turkish inflation metrics have reached the tipping point.
  • The question is not whether the CPI inflation will fall to single digits. The right question shall read «is it going to stay at single digits?».
  • Producer prices were posing the greatest risk to inflation outlook next year. Today’s data provided a relief.
  • The surge in core related to services inflation. May abate in first quarter after annual price adjustments.

Core Inflation

Turkish Lira has depreciated by 17% against US Dollar and by 24% against Euro in a year’s of time. Durable goods prices respond more sensitively to fluctuations in Euro rather than US Dollar. Many consumer goods have prices lists based on Euros (Figure 1).

Euro has reached 1,20 against US Dollar in early September and started a slight descent on the back of FED pricing and increased political risk premium in EuroZone. Sharp movement of Euro against Turkish Lira appears to reached its limit. Accordingly durable goods inflation can fall as low as 5% by March next year.

However services inflation exerts an upward pressure to core inflation (Figure 2). Services inflation reached 9,4% - highest reading since 2009. Subsequently core inflation has reached 11% - another highest reading since year 2004. Services inflation is a function of inflation expectations which is a backward looking indicator. Expectations may start falling down

PPI Inflation

once new-year price adjustments complete in January and after actual inflation starts creeping down in December.

China enacted regulations responding to environmental concerns. Therefore high grade metal prices rose sharply in summer months. Metal prices rose by 17% in four months. Chinese PPI climbed higher in August to 6,3% after staying flat for three months at 5,5%.

Chinese producers keep «reflation» theme alive. Producer prices are increasing both in Europe and the US. Turkey can’t escape the tide and recently strong gains were recorded in producer prices. Finally the pressure has alleviated some in September. A 0,24% increase can provide breathing room for retailers, distributors, and consumers.

Producer prices tend to fluctuate in a wider range compared to consumer prices (Figure 3). Producer prices can fall as low as 8% by March. Recent survey indicators reflected the fact that producers don’t expect further increases in sale prices, confirming the slow down in today’s data.


Producer prices will come down sharply starting with November. By March PPI inflation may fall towards 8%. Barring another supply shock commodity prices seem to stabilize at current levels. That would take some pressure away from Turkey’s inflation.

From a supply-chain perspective producer prices may help dis-inflation process next year and allow CPI inflation to stay in single digit area.

Central bank may stick to its tight stance till expectations start improving. As discussed, expectations has a definitive role on services inflation. Expectations may not improve before February next year. March seems the ideal month for the central bank to respond to dis-inflation.