Turkey's annual inflation declined to 9.79% in July from 10.9% in June, to reach its lowest level in six months, national statistics office TUIK said on August 3. However, core inflation - a measure which strips out volatile elements - strengthened to 9.6% from 9.2%.

The consumer price index (CPI) edged up by 0.15% in July, a figure that was slightly better than the market consensus for a 0.17% m/m rise.

Turkey’s annual inflation rate remained above 10% between February and June, driven mainly by food prices, but during the first half it has steadily dropped from an eight-year high of nearly 12%.

TUIK said food prices declined by 0.71% m/m in June shaving 0.15pp from headline inflation.

This week Turkey's central bank revised its 2017 food inflation forecast from 9% to 10% while it raised its end-2017 consumer price inflation forecast to 8.7% from the previous estimate of 8.5%.

Prices of tobacco products and alcoholic beverages increased 0.39% m/m and clothing prices declined by 3.51% m/m in July. Transport costs went up 1.13% m/m in the month.

The C-index, one of the central bank’s favourite core inflation indicators, increased by 0.49% m/m, accelerating from the previous month’s 0.07%. That brought the annual rise to 9.6% in July from 9.2% in June.

The acceleration in core inflation “reflects the combination of the TRY weakness against the EUR and credit-fuelled domestic demand strength,” Nomura said in a note.

“Foreign trade data out earlier this week already revealed the strains on the external balance owing to strong domestic demand, and these pressures may now be showing up in inflation data too,” it added.

The dip in annual headline inflation was well-telegraphed and will likely reverse over the August-November period before favourable base effects push inflation back to single digits, according to Nomura analysts.

Goldman Sachs has similar views on the inflation outlook. “We expect inflation to rise again as base effects in food prices become more pronounced, and then peak around +11.0%yoy in October and fall to +9.5%yoy in December,” the investment bank said.

Deputy PM Mehmet Simsek conceded that the decline in inflation may be temporary. Food prices pose a risk to the inflation outlook, he told broadcaster NTV on August 3. Simsek added that inflation will fall below 7% starting from next year.

Domestic producer price inflation accelerated to 15.45% y/y in July from 14.87% in June. Producer prices increased 0.72% m/m in the month, following June’s 0.07% m/m rise.

The inflation outlook is projected to recover starting from the last month of the year, becoming more evident in the early months of 2018, the central bank said in the minutes of its last monetary policy committee meeting published on August 1.

“The tight stance in monetary policy will be maintained until the inflation outlook displays a significant improvement. A revision of the monetary policy stance may be considered, should the fiscal policy deviate significantly from this framework, and consequently have an adverse effect on the medium-term inflation outlook,” it added.