Moderate Increase in Turkiye’s Inflation in November
Bottom Line: As we predicted, Turkish CPI moderately surged to 62% annually and 3.3% monthly in November due to continued adverse impacts of deterioration in pricing behaviour, strong consumption, depreciating Turkish Lira (TRY) and high inflation expectations, while the acceleration pace of the CPI partly stabilized as higher borrowing costs starting to slow down consumption. We think expected minimum wage increase in December coupled with elevated upward pressures in services and the impact of natural gas prices will push prices further up in December and beyond. Upside risks like weakening currency, deteriorated pricing behaviour and expected hike in public spending before the 2024 local elections remain strong, which would likely drive the inflation, as the impacts of the strong monetary tightening are still feeding through.
Figure 1: CPI (YoY, % Change) and Policy Rate (%), January 2021 – November 2023
Source: Turkish Statistical Institute, Datastream, Continuum Economics
When annual rate of changes (%) in the CPI's main groups are examined in November, we see that housing with 37.5% was the main group with the lowest annual increase while hotels, cafes and restaurants with 92.9% was the main group where the highest annual increase was realized. It is worth mentioning that health (82.1%), education (81.5%), alcoholic beverages and tobacco (71.4%), and transportation (70%) also recorded remarkable YoY increases. Service prices remained elevated, while housing has been the contributor with 1.44ppt and food with 0.74ppt to the headline inflation.
Core inflation (CPI-C) recorded a 1.96% MoM increase, scaling up to 69.89% on an annual basis as it slightly improved in November. After domestic producer price index (PPI) hit 157.69% hike on annual basis in October 2022, the decline in annual PPI has been remarkable in 2023 so far. Domestic PPI stood at 2.8% MoM, translating into 42.2% YoY in November. Despite a slight increase when compared to October, the fall in PPI demonstrates improvement in cost pressures. These are good news on the inflation front.
Despite mentioned moderate improvements, we are of the view that there are signs that inflation will continue to stay high in the remainder of 2023, and in 2024, in line with Central Bank of Republic of Turkiye's (CBRT) inflation projections. We think expected minimum wage increase in December coupled with elevated upward pressures in services and the impact of natural gas prices will push the prices further up in December and beyond. Upside risks like weakening currency, deteriorated pricing behaviour and expected hike in public spending before the 2024 local elections remain strong, which would likely drive the inflation in the near future.
According to CBRT's communications, CBRT remains concerned about the course of inflation, the strong course of domestic demand, the stickiness of services inflation, and the deterioration in inflation expectations. Despite these, CBRT continues to gain investor credibility thanks to recent hikes and decent communications as the lagged impacts of the tightening cycle are still feeding through. (Note: The CBRT raised the policy rate from 35% to 40% on November 23 MPC meeting to establish the disinflation course as soon as possible, and it strongly signalled that the cycle will be completed in a short period of time if inflation would allow.)
We think CBRT continues to aim at encouraging 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. The rate hikes after June will help cool off the prices but we think business may experience difficulties in finding potential funding sources in the near future, which may eventually trigger pressure over the domestic industries. The latest batch of data show higher borrowing costs starting to slow down consumption, which is good sign for the economy, as soon as CBRT remains determined to keep monetary policy tight for a prolonged period.