Turkish Inflation Continued Its Spiking Cycle in October
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Bottom Line: As predicted, Turkish CPI surged to 61.36% annually and 3.43% monthly in October due to continuing strength in demand conditions and lending, deterioration in pricing behaviour, depreciating Turkish Lira (TRY) and high inflation expectations, while the pace slightly decelerated when compared to August and September. We think upside risks emanating from increasing food and energy prices remain high for the country, in addition to the weakening currency, and expected hike in public spending before the 2024 local elections would likely drive the inflation in Q4 2023 and Q1 2024 into a bumpy road.
Figure 1: Inflation (YoY, % Change), October 2018 – October 2023
Source: Turkish Statistical Institute, Datastream, Continuum Economics
When annual rate of changes (%) in the CPI’s main groups are examined in October, we see that housing with 25.9% was the main group with the lowest annual increase while hotels, cafes and restaurants with 94.1% was the main group where the highest annual increase was realized. It is worth mentioning that education (80.8%), health (81.3%), transportation (72%) and food and non-alcoholic beverages (72%) also recorded remarkable YoY increases, putting burden over Turkish citizens. When Turkstat figures are analysed in detail, rise in transportation prices appeared to have lost pace while the lagged effects of wages and taxes hikes on inflation seemed partly weakened. Meanwhile, services prices remained elevated.
Another important inflation driver remained as the skyrocketing rents. Impacted by multiple sources such as high inflation, demand for housing for saving purposes and supply problems, the upsurge in rents continues. Central Bank of Republic of Turkiye’s (CBRT) Governor Erkan recently mentioned that it will take some time for the projected slowdown in new house prices and rent increases to spill over into inflation, and this is due to the high inertia in services inflation. It appears the prevalence of time-dependent price updating behavior in services causes price increases to spread over a longer period of time.
According to CBRT's 2023-IV Inflation Report circulated on November 2, CBRT increased its inflation forecasts for the end of 2023 and 2024, and made a very limited downward update on its end-2025 forecast. The Central Bank lifted its inflation forecasts by 7 points for the end of 2023 with an increase from 58% to 65%. For the end of 2024, the projection rose by 3 points from 33% to 36%, while the forecast was reduced by 1 point from 15% to 14% for the end of 2025.
In line with CBRT’s inflation projection for 2023, we are of the view that there are signs that inflation will continue to stay high in the remainder of 2023. As we underlined before, CBRT remained concerned about the course of inflation, the strong course of domestic demand, the stickiness of services inflation, and the deterioration in inflation expectations.
The CBRT raised the policy rate from 30% to 35% on October 26 MPC meeting to establish the disinflation course as soon as possible, to anchor inflation expectations, to control the deterioration in pricing behaviour and to squeeze demand, as inflation continues to bite. On this matter, Governor Erkan said that the cumulative effects of monetary policy will kick in during the transition period, and CBRT aims to enter the disinflation process in the second half of 2024. We think that this disinflation framework, which implies a waiver of GDP growth, requires additional tightening in monetary policy and strong fiscal stance (including wage and managed price policy) that should be compatible with the assumptions noted by the inflation report. This can help cool down inflation in the future, but the transition would take time (lagged impacts) as CBRT aims to encourage banks to slow loan growth and, in turn, slow private consumption growth and credit-card spending, which are expected to relieve the demand-cost pressure to an extent in the midterm.
According to the statement by the CBRT, while the year-end inflation is projected to be close to the upper bound of the forecast range provided in the Inflation Report, the Bank evaluated that the underlying trend in monthly inflation is on course to decline, but we think the country will have to wait 2H of 2024 to experience moderate falls taking into account that upside risks emanating from increasing food and energy prices remain high for the country in 2024, in addition to the weakening currency, and expected hike in public spending before the 2024 local elections (here).