Inflation rises further, eyes on MPC

TURKEY - In Brief 04 Jun 2018 by Murat Ucer

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May CPI inflation came in at 1.6%, m/m, somewhat higher than the consensus expectation of 1.4%-1.5%, reflecting a myriad of mainly cost-push factors, such as lira depreciation, higher oil prices and the Ramadan effect on food prices. The 12-month CPI rate rose sharply higher to 12.1%, y/y, from 10.8% in April, while PPI inflation quickened even more -- to 20.2%, y/y, from 16.4% -- as cost-push effects were by definition more influential on the latter (Graph 1; Table 2). Judging from monthly contributions, higher headline CPI inflation appears driven chiefly by food and energy components (Graph 2).That said, all underlying inflation indicators – non-food, core (C-index) and services – have continued to edge up as well, attesting to the continuation of broad-based inflation pressures (Table 2; Graphs 3-5). Core inflation as such broke another record, rising to 12.6%, y/y, from 12.2% y/y in April, but the increase was somewhat less pronounced than we had estimated. Specifically, monthly core inflation (by our seasonally-adjusted calculation) somewhat decelerated in May to 1%, m/m, from 1.3% in April, but we need to see further data points to judge whether this is just pure noise, or reflect reduced pricing power -- or reduced ability to pass lira weakness onto the consumer -- on the back of a weaker economy. Even then, the figure is hardly comforting – with core inflation still running at a rather elevated 13% rate (annualized, 3-month moving averages). We continue to expect 12-month core inflation to climb further in the coming months, though we shall be watching how the opposite forces of exchange rate pass-through on the one hand, and a markedly weaker economy on the o...