Türkiye | Challenging outlook on inflation trend

Summary

Consumer prices rose by 3.37% m/m in May, higher than expectations (3.1% consensus and 3% ours), leading the annual inflation to rise to 75.45%. We expect inflation to decline faster in 2H24 on favorable base effects and reach 43% at the year end.

Key points

• Key points:
• The seasonal adjusted monthly CPI jumped to 3.65%, while its 3-month trend continued easing to 3.2% (vs. CBRT target of 1.5% in 4Q24). High services inflation stemming from backward indexation and second round effects, and the steadiness of basic goods inflation on top of still solid demand prevent a faster improvement in 3-month core C inflation trend (3.6% vs 3.9% in April).
• Cost push factors have eased recently as monthly producer price inflation slowed down to 2.0% (3.6% m/m prev.). The improving expectation of firms regarding the cost of production for the next three months signal further moderation in cost push factors.
• Strong inertia, slightly easing but still high inflation expectations and solid demand remain upside risks on inflation outlook in the near future.
• We expect annual inflation to decelerate faster starting from June on favorable base effects and to decline to 43% at the end of 2024 under the assumption of no additional wage adjustment, gradual energy price hikes, $84 average Brent oil price per barrel and a year-end US Dollar/TL currency of 38.
• If inflation could get closer to the upper bound of Central Bank interim inflation forecast (42%) by year-end, the CBRT could start an easing cycle gradually in 4Q24 with two 250 bps cuts in the policy rate.

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