CBRT’s unenviable uphill battle

TURKEY - In Brief 04 Sep 2023 by Murat Ucer

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Consumer prices rose by a near-double digit monthly rate of 9.1% in August (August 2022: 1.5%), significantly higher than consensus forecasts and our own, atop a 9.5% increase in July. The twelve-month rate rose sharply to almost 60% -- 58.9%, to be precise -- from 47.8% in July. Monthly PPI inflation was also elevated, at 5.9%, with the 12-month rate rising also -- to 49.4% from 44.5% in July (Graph 1; Table 1). The two key drivers of the increase in annual inflation, based on the contributions data, were food and transportation, though almost all categories contributed more this August vs. last (Graph 2). Food inflation stood at 72.9%, y/y, in August, up from 60.7% in July, on the back of surging unprocessed food inflation (Graph 3). Annual core and service inflation also rose sharply, all of which are running markedly above CPI-inflation, with the two popular core inflation measures hovering in the 63-65%, y/y, range, and service inflation, which is rather broad-based, at just under 80% (Table 2; Graphs 4-5). It is worth adding that the diffusion index (our calculation) is also at near all-time highs, pointing to broad-based pressures (Graph 6). While the most important driver of the very poor July-August inflation prints is the TL depreciation of June-July (Graph 7), we think -- and the monthly inflation rate should thus decelerate in the remainder of the year as the pass-through effect peters out (assuming there will be no major currency shock along the way), the CBRT’s 62% forecast (the upper band of its latest forecast) is already looking optimistic to us. A bigger problem is that we see no reason why inflation should decelerate much next year – like to 33% by t...