Turkey | October CPI came close to expectations

Summary

Consumer prices increased by 2.13% mom in October, leading the annual inflation to increase to 11.89%. Annual core inflation increased to 11.5% from 11.3%. We expect consumer inflation to end the year near 13% and evaluate the risks on the upside for our 2021 inflation forecast of 10%, given the high currency volatility.

Key points

• Key points:
• Despite the sharp depreciation in currency, core prices increased by 1.9% mom, still displaying a gradual exchange rate pass-thru on negative output gap, which could accelerate in the coming months.
• Cost push factors could underpin the upside pressures on consumer inflation in the coming months as domestic producer prices (3.6% mom) jumped up by 18.2% in annual terms, accelerating from 14.3% on top of unfavorable base effects.
• Only a gradual exchange rate pass-thru so far, still strong domestic demand, increasing cost-push factors and high inertia on top of the stickiness in trend inflation maintain the upside risks on inflation.
• Expected slow-down in activity, recent sharp deceleration in credits, relatively stable oil prices and some tax incentives would partially absorb the upside pressures.
• We expect the headline inflation to get close to 13% at the end of the year, which would require the Central Bank to take clearer bold steps to tighten the monetary policy further.

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