Consumer prices increased 0.46% m/m (market consensus forecast: 0.42% m/m) in December, the statistics institute said on Friday.

This brought the annual rate of inflation to 7.40% from 7.32% in the previous month. The government missed its 2013 official inflation target of 5% as it had been the case in 2012 (target: 5, actual end-year CPI:  6.2%) and 2011 (target: 5.5%, actual end-year CPI: 10.4%).

Food prices rose 1.46% m/m (9.67% annual inflation), transportation costs increased 1.1% m/m (9.77% annual inflation) in December while clothing prices fell 2.58% m/m and communication prices declined 0.13% m/m.

Impact of the depreciation of TRY was visible in the rise of energy items; LPG prices were up 12.14% m/m, cylinder-gas prices rose 9.35% m/m, diesel rose 1.6% m/m and gasoline increased 1.57% m/m.

Core inflation was benign. The Central Bank’s favourite core inflation indicator, the I-index (which excludes the prices of energy, food & non-alcoholic beverages, alcoholic beverages, tobacco products and gold) fell 0.11% m/m for an annualised rate of 7.08%. The I-index had increased 0.63% m/m in November and 1.78% m/m in October.

Inflation outlook has deteriorated. TRY has depreciated sharply especially in the second half the 2013 and the currency sank to record lows in December amid the heightened political risks. FX pass-through should take its toll on inflation. Higher energy costs should also be taken into account. On top of that, the government this week raised the special consumption tax on new cars, alcoholic drinks, mobile phones, and cigarettes. This is expected to push inflation by 1% to around 8% this year.

Producer prices rose 1.11% m/m in December after increasing 0.62% m/m in the previous month. The annual PPI inflation quickened to 6.97% from 5.67% in November.

In October, the Central Bank raised its end-2013 inflation forecast to 6.8% from a previous 6.2% and end-2014 forecast to 5.3% from a previous 5% due to exchange rate developments and oil prices.