Turkish inflation has leapt again, soaring to 17.9% y/y in August from July’s 15.85% y/y, largely driven by the effects of the tanking Turkish lira (TRY).
All the indications are that annual inflation is likely to climb even further over the coming months. The outlook prompted the central bank to state that it will adjust its monetary stance at September 13’s monetary policy committee (MPC). However, Capital Economics said in a note to investors that while a rate hike of 700-1,000 bp is needed to “bring real interest rates back to positive territory and reassure the markets that policymakers are willing and able to tackle high inflation” it expected the Central Bank of the Republic of Turkey (CBRT) to only raise policy rates by 200bp because of pressure from the government.
The market consensus remains that populist President Recep Tayyip Erdogan, who has notoriously, unconventionally and repeatedly pushed for cheaper money even amid Turkey’s overheating economy, has taken control of monetary policy under the executive presidency he began in July.
The widespread feeling that Turkey will not go for a radical rate increase persisted despite Berat Albayrak, Turkey’s recently appointed finance minister and Erdogan’s son-in-law, saying in an interview with Reuters that the country had reached the point where it needed a “full-fledged fight against inflation.”
The TRY rebounded slightly following the CBRT announcement but by around 16:15 local time had lost its gains and was trading 1.74% weaker at 6.6315 to the dollar. In the year to date, it is now down around 43% against the USD, having lost 25% in July alone.
Capital said: “Today’s inflation figures were a touch above the consensus forecast for inflation to rise to 17.6% y/y, from 15.8% y/y in July. Inflation is far above the upper bound of the central bank’s 5±2% target range. The breakdown of the data showed a broad-based pick-up in price pressures. Of the 12 major price categories, inflation rose in all but one. In six of the categories, the annual rate of inflation rose by more than 2.5%-pts.”
Core inflation in August jumped to 17.2% y/y from 15.1% y/y in July.
Capital further noted: “A weaker currency has pushed up the cost of imports and firms have been quick to pass this on to consumers. Inflation probably has further to rise over the coming months. The lira’s collapse last month probably hadn’t fully filtered through into consumer prices around the time that the surveys were taken. But data also released this morning suggests that pipeline price pressures are building—producer price inflation [PPI] hit 32.1% y/y in August, up from 25.0% in July.”
Dire state of demand
The jump in PPI, which was the highest increase recorded since 2003, was emphasised by Timothy Ash at BlueBay Asset Management in his response to the inflation figures. He wrote in a note: “[…] I think the shocking and more interesting print was the 6.6% MOM increase in the PPI, taking the YOY rate from 25% to 32.13%, which is probably a reflection of the exchange rate pass thru. That said the huge gap between the PPI and the CPI/headline I just think reflects the dire state now of domestic demand—with retail struggling to pass on the exchange rate moves because of the collapse in domestic demand.
“Difficult dilemma now for the CBRT mid month—market expecting a hike in the base rate, but they will be looking at the PPI and demand indicators are thinking about the collapsing state of real demand. Reality is if they don't hike again by something significant, the TRY will be left exposed again. They need to do whatever they need to do short term to hold the lira, and that means hiking rates.”
In its assessment of the data release, ING concluded: “Overall, August data shows the inflation outlook remains poor with further worsening in the price dynamics driven by cost factors, while the evolution of the exchange rate and food prices will likely determine the inflation evolution given ongoing slowdown in demand pressures.”
Within the inflation report, the energy index, which tracks the price of power and refined oil products, rose 21.34% from a year ago, compared with 17.5% y/y in July. Food prices, which makes up nearly a quarter of the consumer inflation basket, rose an annual 19.75%, up from 19.4% y/y in July.
It was especially energy and core goods that were behind the ongoing impact of exchange rate pass-through and, said ING, there was a “continuing rise in sticky services inflation with across the board pressure in sub-items including rent”.
“The PPI that has been on an uptrend since February show current widespread pricing pressures in almost all groups,” it added.
Transportation provided an 80bp contribution to the monthly inflation reading mainly due to the impact of exchange rate developments. “It should also be noted that a price compensation system, guaranteeing maximum diesel and gas oil prices to users at the price levels prevailing in mid-May, is put in place with an objective of offsetting any changes in international oil prices and the exchange rate by symmetrical cuts in special oil taxes,” ING said. “Last month, the government allowed some of the accumulated price increases in recent months to be reflected in gasoline prices to ease some of the fiscal burdens [and] that in return pushed already high transportation inflation further up.”
Other strong drivers in the inflation gain were utilities (56bp), home appliances (36bp) and dining and lodging (14bp).
Clothing stood out as the major group that pulled the headline down—by 11bp—because of seasonality, though the monthly figure in this group was the highest of August readings since the start of the inflation series with -1.6%, ING said.