Surprise Core Drop Suggests Turkey Inflation May Have Peaked

Updated on
  • Core inflation unexpectedly drops while headline CPI climbs
  • Turkstat method revision may have triggered lower core rate

Turkey’s core inflation eased in April, suggesting that consumer price gains may have peaked even as the headline rate rose to the highest since 2008.

Annual core inflation, which strips out the impact of volatile items such as food, slowed to 9.4 percent from 9.5 percent in March, compared with the median estimate of 9.9 percent in a Bloomberg survey of economists. Headline inflation accelerated for a fifth month to 11.9 percent from 11.3 percent during the same period, the state statistics office said Wednesday -- the highest since 2008 and faster than economists forecast.

The unexpected drop in the core index is partly due to a revision in Turkstat’s methodology in January, which pushed apparel prices about 3 percentage points below historical April levels, according to Odeabank AS economist Sakir Turan. So price dynamics may have improved earlier than predicted, he said.

“The worst may be already behind us unless there is another price shock, such as a plunge in the currency,” said Turan, who had estimated an annual rate of 10 percent. “That explains the muted reaction to the data, although the headline inflation rate was higher than expected.”

Tight Money

A deceleration in price gains could lead to a faster-than-expected loosening of monetary policy. Governor Murat Cetinkaya has pledged to keep money tight until the inflation outlook improves. The bank raised the cost of funding to commercial lenders to the highest in more than five years after the lira fell to a record in January.

The lira weakened after the data and was trading 0.3 percent lower at 3.5370 per dollar at 2:58 p.m. in Istanbul.

Headline inflation exceeded the 11.7 percent median forecast of economists surveyed by Bloomberg. Price climbs were led by food costs, which rose 15.6 percent from a year earlier and 1.2 percent from March. Overall, prices were up 1.3 percent from the previous month, Turkey’s statistics institute said.

Last week, the central bank said it expects inflation to accelerate in the short term before slowing in the second half of the year.

In January, the statistics office instituted an annual fixed weight for items used to calculate price rises in clothing and food. In the past, it allocated weights that varied monthly. The central bank said in its April 28 inflation report that the new system was likely to drive down clothing inflation in April and May, and push up inflation after August.

The methodology change will push the headline rate higher during the last quarter of this year, according to Ibrahim Aksoy, a strategist at HSBC Investment Management in Istanbul. Following the likely peak in April, consumer price gains will be volatile during the rest of the year and end 2017 around 9.5 percent, Aksoy said in an emailed note.

Not everyone agrees April was the worst month.

“We are not fully convinced that this was the peak in headline inflation,” Inan Demir, an economist at Nomura Plc in London, said by email, citing the volatility in food prices. Either way, the inflation index will have peaked by the time the Turkish central bank’s rate-setting committee meets again in June.

“By that time, the bank will have seen the May inflation print as well, and the peak in headline inflation coupled with core edging down, supported by recent appreciation of the lira, may provide the justification for a gradual easing” in liquidity, he said.

— With assistance by Firat Kozok

(Updates with analyst quote from 11th paragraph.)
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