Inflation ends the year not as high as feared, but pretty high nevertheless

TURKEY - In Brief 03 Jan 2019 by Murat Ucer

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Consumer prices dropped by 0.4% in December, broadly in line with consensus forecasts, ending the year at 20.3%, y/y, further down from 21.6% in November and a peak of 25.2% in October, which, incidentally, corresponds to the worst yearend performance since 2002, when we were in an entirely different macro environment (Graph 1). After dropping by 2.2% in the month (December 2017: 1.4%), 12-month producer price inflation also eased to 33.6% in December, down from 38.5%, with the wedge between the PPI- and CPI-inflation narrowing further to some 13 percentage points (pps) (Graph 2; Table 1).In terms of monthly contributions (to CPI-inflation), the decline appears broad-based, but is principally driven by transportation category, which shaved off 0.4 pps from this December’s CPI-inflation, versus a 0.3 pps addition to last December’s print (Graph 3). This, in turn, seems to be driven by the decline in energy inflation to 20.8% in December, from 25.3% in November (Table 2). Meanwhile, 12-month food inflation eased as well -- yet relatively modestly -- to 25.1% in December, from 25.7% a month earlier, while the decline in non-food inflation (our calculations) was more pronounced (Graph 4). In terms of ‘underlying’ indicators, core inflation (C-index) continued to ease, dropping to 19.5% in December, y/y, from 20.7% in November, which mainly owes to lira’s cumulative appreciation during October-December -- and also to November tax cuts -- with the former amounting to some 20%, in average basket terms (Graphs 5-6). Interestingly, service inflation remained relatively sticky, which eased only modestly to 14.5%, y/y, from 14.7% in November (Graph 7; see also Table 2).All in all...