Turkish inflation maintained its uptrend in February reflecting still strong cost-push factors, sticky services inflation, and elevated inflation expectations.
With another higher than expected reading of 0.91%, annual CPI inflation in February maintained its uptrend, reaching 15.6% (consensus: 15.4% and our call: 15.2%) from 15.0% a month ago. The latest data, which includes a further rise in the core rate to 16.2%, confirms that the inflation dynamics affected by demand conditions, elevated services inflation, the recent uptrend in commodity prices and supply constraints during the pandemic, remain challenging.
In the breakdown, we see:
1) goods inflation at 17.3%, the highest since mid-2019, up from 16.5% a month ago and attributable especially to processed food and clothing along with base effects from the last year;
2) services inflation inching up further to 11.7%, driven by rent as well as catering and transportation services.
The Domestic Producer Price Index (D-PPI) exceeded 27%, having seen a sharp uptrend since last May on the back of exchange rate developments but also recent pressure on commodity prices and strong base effects. The outlook indicates significant producer price-driven cost pressures on the inflation outlook.
Regarding the main expenditure groups:
Overall, the higher-than-expected change in inflation last month and continuing pricing pressures reflect still strong cost-push factors, sticky services inflation and elevated inflation expectations. Inflation will likely peak in April, though upside risks continue given the likely recovery in demand conditions in certain groups, the impact of rising international commodity prices, the possibility of tax adjustments and still high inflation expectations.
Given this backdrop, the CBT will remain cautious in the near term given not only inflationary pressures, but also concern about the level and composition of reserves, high dollarisation and the need to maintain capital flows.
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