Türkiye | Inflation will accelerate in near term

Consumer prices rose by 3.92% in June, lower than both our expectation (4.85%) and market consensus (4.3%), whereas annual inflation dropped to 38.2% from 39.6% in May on favorable base effects led by energy prices. We expect annual consumer inflation to increase now onwards and finish the year at 55%.

Key points

• Key points:
• After increasing only 7.8% in the first 5 months of the year, domestic producer prices rose by 6.5% m/m in June but annual producer prices still decelerated to 40.4% on supportive base effects led by energy prices.
• Core and services prices increased by 25.5% and 35% in the first half of the year, respectively, while cumulative increase in food prices materialized as 28.7% in the first half of the year.
• If we check seasonal adjusted 3 month moving average monthly inflation trend, CPI and Core-C trends have already been increasing since April and have reached near 3% (40-45% if annualized), while services prices trend remains near 4% (58% if annualized).
• The upside risks on inflation are strengthening in the short term, led by the recent sharp currency depreciation, further cost pressure being reinforced by above inflation wage adjustments and expected increase in corporate tax rate, solid demand-pull factors on recent signals that the monetary policy will only gradually normalize, and therefore worsening second round price effects and inflation expectations.
• The overall stance of the economic policies against inflation will be decisive about the inflation outlook. However, reducing inflation below 20% in the medium run will require structural reforms in a well-coordinated monetary and fiscal policy framework.

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