Inflation nears 18%, the CBRT says I’ll “adjust”

TURKEY - In Brief 03 Sep 2018 by Murat Ucer

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Consumer prices rose by a somewhat higher than expected 2.3% in August, m/m, taking the 12-month rate to just under 18% (from 15.8% in July), while producer prices surged by a massive 6.6% in the month, with the 12-month rate rising to 32.1%, from 25% in July (Graph 1; Table 1). Needless to say, the very high level of producer price inflation bodes poorly for future inflation pressures and/or profitability of firms. In terms of contributions, categories that are most closely affected from lira’s depreciation (e.g., houseware, housing, transportation) seem to have been the key drivers of monthly CPI-inflation in August. On the other hand, food inflation was relatively benign, staying broadly flat in the month, but edging up relatively modestly in 12-month terms to 19.75% (from 19.4%), because of last August’s negative print (Graph 2-3).Unsurprisingly, underlying inflation indicators continued to deteriorate as well, with core inflation (C-index) rising to 17.2%, from 15.1% in July (largely reflecting exchange rate pass-through), and service inflation also increasing noticeably to 11.8%, from 11%, which seemed reasonably broad-based as well (Table 2; Graphs 4-5). In terms of the outlook, the worst is certainly not over, in our view. Core and CPI-inflation should both continue to edge up in the coming months (despite the contraction in the economy), with the CPI-inflation approaching 20%, as, among other drivers, the pass-through from recent lira weakness continues (Graph 6), recent energy price hikes add another 0.3-0.4 pp to going rate of inflation and food inflation (processed) likely increases further.After today’s inflation print, the CBRT has released a statement, s...