Turkey’s inflation is below expectations in September

Turkey’s consumer prices increased by 0.97% in September, while annual inflation was realized as 11.75%.

Economists who took part in the Bloomberg survey expected an inflation rate of 1.30% on a monthly basis and 12.13% annually. In this respect, we can say that the data received are more positive than expectations. We see that the slowdown driven by low demand, especially due to clothing prices, rather than the cost pressure from the increase in the exchange rate, was more effective in September inflation.


If we look at the sub-items of inflation; We see that the items that show a decrease in prices on a monthly basis are clothing and shoes, which have a very intense season and seasonal effect. There is a monthly decrease of 0.03% in clothing, which we are used to seeing a rapid increase with the seasonal effect in September. The annual rate of increase in the relevant item decreased from 9.2% to 6.9%. In an environment where the tourism season was not good, people did not move much, did not go out as much as before, and education was carried out remotely, prices in clothing fell instead of increasing in September, as a reflection of the stagnation. On the other hand, we observe that there was no increase in education in September with the effect of VAT and distance education.


We consider the monthly increase of 0.66% in food inflation normal. Although the annual food inflation, which accelerated from 13.5% to 15% in September, remains above the targeted level, we expect the upward trend in food inflation to continue for the rest of the year. Although housing is one of the items that rose the most with 0.93% on a monthly basis, the annual price increase decreased from 11.3% to 10%. The pressure on prices due to the accelerated demand due to the decrease in housing interest rates will be replaced by low demand with the increase in interest rates. Energy inflation also declined from 9.6% to 6.8% on an annual basis as a result of the oil prices suppressed by the pandemic. Items that made the most upward contribution to inflation were respectively; Household goods increased by 3.02% and transportation by 1.84%. Unlike many items, the exchange rate effect in durable goods is more noticeable. There is an increase of 3.7% on a monthly basis only in durable goods. It can be expected that the price increases in automobiles due to the increase in SCT and tax base adjustments will continue with the reflection of the exchange rate effect in the following months.


Core inflation, excluding volatile items such as food and energy, is also in an upward trend. While the C indicator increased above the general CPI with an increase of 1.3% in September, it reached 11.3% on an annual basis. We expect the lagged effect of the exchange rate, which mostly affected core inflation and PPI currently, to reflect on the general price increases in the upcoming period and to continue the upward pressure on the CPI.


Of course, the recent rise in exchange rates has been the center of the forecasts for an increase in inflation. While the cost pressure from the exchange rate effect has an upward effect on inflation, the significant slowdown in credits, partly caused by the increase in exchange rates, presses inflation down through the demand channel. In the realization of September, we see that the stagnation effect caused by this decrease in demand became more prominent. On the other hand, cost factors are still not fully included in the final prices, since the PPI increase in previous months did not have a full pass-through effect. Exchange rate pass-through, which normally enters prices with a 2-3 month delay within the historical cycle of inflation, affects prices in a period of 1-2 months in the last 2 years. Input costs, which are reflected in the PPI, continue to increase at a high rate. Monthly PPI increased by 2.35% and 2.65% in August and September, respectively. Thus, the annual PPI increased to 14.3%. The producers, whose costs are heavily loaded, will reflect these prices on consumer prices in the upcoming period. Therefore, October inflation may also be high. The rapid depreciation of TRY, which fell around 23% against the USD this year, after August will affect prices towards the end of the year with the effect of the exchange rate increase.


In September, inflation did not change much at 11.75% compared to August. The Central Bank had advanced the tightening measures implemented since August on September 24, MPC, increased the interest rate by 200 basis points and created a new corridor for the daily funding rate. The weighted average funding rate is at 11.3%, and the overnight lending rate is at 11.75%. We are at a par with inflation due to the upper band of the interest rate corridor. However, if the funding will be directed to the late liquidity window, the rate of 13.25% again creates a margin between interest and inflation. If inflation increased by more than 12% as expected in September, the forecast of an interest rate hike on October 22 would have been made much easier. We continue to expect a realization above the 10.5% inflation expectation made for the end of the year in the New Economy Program. The Central Bank's forward-looking guidance on inflation and monetary policy will be of critical importance in the presentation of the Inflation Report on October 28, with a possible interest rate decision and tightening guidance to be taken at the MPC on October 22nd. As the upward pressure in inflation continues, it will be necessary to increase interest rates to create positive real interest rates.

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