January headline CPI inflation print was not surprising in the sense that it almost met the average expectations. Furthermore, the adverse weather conditions in Turkey’s greenhouse production hub Antalya and the government’s recently intensified efforts to control retail food prices in the markets have created expectations of a sharp increase in food prices. Thus, January’s CPI inflation at 1.06%, almost matched the expected by 1.1%.
The CPI inflation, which had spiked to 25.4% in the previous year had closed 2018 from 20.3%. With the January numbers included we now see Turkey’s CPI inflation steady at 20.35%.
The month-on-month increase in the food price inflation in January is at a tremendous level of 6,43%, which is even higher in double digits for various goods in the food basket. 12-month CPI inflation in food prices at 31% is no doubt hurting the AKP voters directly ahead of the March 31st local elections. Yet given the rigidities in Turkey’s agriculture sector and the government’s failure in addressing the long standing problems hint that food price inflation will hardly ease beyond seasonality.
Seasonal sales amidst the end of winter months as expected pulled down the clothing and footwear price inflation down by 8% though on 12-month level it is still in double digits at 12.5%. With the production costs elevated, it is not realistic to expect that new season clothing products to take their place on the shelves with cheap prices once the discount campaigns end.
The most surprising development in January inflation details was the decline in housing prices by 3.1%; as in 12 month terms, it is at 17%. The government’s support to the sector through tax cuts and public bank backed cheap loans hardly has erased the real problem in the housing sectors; that is excess supply and weak demand. Thus, the decline in housing prices should be expected to continue for the most of 2019.
On the health side, the monthly inflation is 3.6%, bringing the annual level to 18%. Very high food price inflation along with high prices on health spending should be expected to take its toll on consumers whom can also be viewed as the voter base on the countdown to the March local elections.
The pace of the core inflation is very important in determining the future course of headline CPI inflation of course. Lira’s relative gain of ground along with many emerging market currencies recently have had its positive effects on the core inflation side. Nevertheless, the C Index (excluding energy, food, non-alcoholic beverages, alcoholic beverages, tobacco and gold) remained almost unchanged with a marginal increase of 0.04% in January; with the annual level still very high at 19%. Core inflation also had peaked at 24% last fall and has been declining since then. However, with the exchange rate stabilizing and even partially appreciating, the core inflation stuck at around 19% should be a warning for those expecting Turkey’s CPI inflation easing down to 13-15% by the end of 2019.
The level of producer price inflation is also worth stressing in terms of the potential spillover effects on the CPI side. Domestic producer price index (D-PPI) increased by 0.45% in January 2019 compared to the previous month and by 32.93% compared to the same month of the previous year. Or, it has retreated rather lightly from 33.64% at the end of 2018. The elevated cost of production is dangerous in terms of being reflected on the CPI side if demand revives even at a marginal extent.
With help from the stability of the lira in the recent couple of months added its mild appreciation during January , the manufacturing industry price inflation was 0.5% in January. Yet, the annual level still remains high at 30%. In fact, the details of the main industry groups make the story immediately tangible: January intermediary goods price inflation increased by 0.5% (32.4% yoy); durable goods price inflation is up 1% per month and 24% annually; while capital goods price inflation for January is at 1.9% reaching to 32.4% on annual basis.
What then is the course of Turkey’s inflation?
Despite the retreat from last year’s peak from 25% to 20%, it is necessary to say that the main challenge on the inflation front has just started. Following the currency crisis that had peaked last year in August, the employed monetary and fiscal policy measures, tax cuts, interest rate incentives for various sectors along with Fed’s more dovish stance recently have helped in preventing further spike in Turkey’s CPI inflation beyond 25%.
Yet, the fact that no further appreciation could be expected from the lira beyond the range of 5.0-5.30 against the dollar hints that this rapid withdrawal in inflation cannot be sustained. The deteriorated inflation expectations, increased foreign exchange deposits of the households, political uncertainties, economic uncertainties, the problem of low confidence in the economy, and the combination of all these with the revised stickiness of Turkey’s inflation translate to the fact that the high inflation environment will be here to stay. Except for the base year effect, which is the months that Turkey’s CPI inflation staged serious spikes, CPI inflation seems designated to remain within 18-20% for some time to come.
If an early interest rate cut, ie. an interest rate cut in the first half of 2019, is added, lowering headline inflation will not be as easy as it was or the October-December 2018 period. On the contrary, as long as it becomes clear to the government that that there is a need for steps with a medium to long-term perspective rather than instant solutions to pressuring economic problems in the coming months, the fight against inflation will be a lost cause.
Therefore, it is quite optimistic to be able to say that CPI inflation will reach 13% at the end of the year as argued by some economists even regardless of possible softening from both the Fed and other major central banks’ policies. A more realistic scenario would be that CPI inflation will remain range bound in 18-20%for most of 2019.