Inflation surges, chastening forecasters

TURKEY - In Brief 03 Jul 2018 by Murat Ucer

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Consumer prices rose by a whopping 2.6% in June – at a rate about twice faster than the consensus -- which raised the 12-month rate to 15.4%, up from 12.1% in May. We are now looking to CPI inflation ending the year in the 14%-15% range, mechanically speaking, though we shall shortly revisit this forecast carefully. A key driver of our humiliating miss as such, was food inflation, which rose much more than we had factored into our forecast, but significant upward surprises in other – mainly energy-intensive (e.g. transportation) as well as pass-through sensitive (e.g., housewares) -- categories also contributed greatly to our poor forecast performance. Monthly increase in producer prices was also dramatic, at 3%, which took the 12-month rate to 23.7%, from 20.2% in May, suggesting that cost pressures continue to pile up, signaling further trouble ahead (Table 1; Graphs 1-2).Today’s poor print was of course not just a matter of sharply higher food prices. Underlying inflation indicators – core, services and non-food – all rose much more sharply than we had forecasted, with core inflation rising to 14.6% (y/y) in June, from 12.6% in May; service inflation rising to 11%, from 9.5% (above the 10% threshold for the first time since 2008), and non-food inflation also surging to 13.9%, from 12.2% (Table 2; Graphs 3-6). Considering that a relatively sharp slowdown is now underway, these increases are probably attributable to stickiness in the inflation process and backward-looking pricing behavior. Put differently and more broadly, today’s data proves that we’ve been too complacent on the inflation outlook; the inflation genie is clearly out of the bottle, with the pricing beh...