Food up, core down, service sticky

TURKEY - In Brief 04 Feb 2019 by Murat Ucer

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January consumer price inflation, at 1.06%, m/m, came in broadly in line with expectations, taking the 12-month rate marginally higher to 20.4%, from 20.3% a month earlier. Twelve-month domestic-PPI inflation continued to decline, though at a much slower pace than in recent months, to 32.9% from 33.6% in December. Needless to say, both the level of PPI inflation and its spread over CPI inflation, remain too elevated for comfort, attesting to more cost pressures in store (Graph 1; Table 1). Looking at the contributions of the main spending groups, food prices drove CPI inflation higher by over one percentage point (pp), contributing 1.5 percentage points to monthly CPI-inflation this January, versus 0.4 pp last January, while housing (reflecting the drop in utility prices) moved in the opposite direction, shaving off some 0.8 pp from CPI inflation (Graph 2). The sharp increase in food prices was driven, as usual, by unprocessed food prices, which have jumped by 12.3% in the month, m/m, with the 12-month food inflation therefore surging to 31%, from 25.1% in December (Graph 3).In terms of the underlying inflation indicators, the 12-month core inflation dropped further in January to 19%, from 19.5% in December thanks to lagged effects of a stronger lira (Graph 4; Table 2), although the drop, arguably, should have been steeper given the widening (negative) output gap. Interestingly, the 12-month service inflation rose quite noticeably in the month, from 14.5% to 15.4%, attesting to price stickiness and somewhat perverse pricing behavior under continued cost pressures (Graph 5). (As an example of the latter, we noted, for example, that restaurants -- and not necessarily all...