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ANALYSIS – Turkey’s June inflation: Bad omen!

June inflation details tell us that in the July-August period, the annual headline CPI inflation will march towards 18 per cent. Speaking for the end of the year, consumer price inflation of 14-15 percent is now realistic. Thus, it is not a surprise that interest rates will continue to rise as an adapter to this high inflation; with perhaps the central bank of Turkey delivering another 200 basis points rate hike.

ANALYSIS – Turkey’s June inflation: Bad omen!

June inflation reading came in so bad that one does not even want to write the details. Despite an average expectation of 1.3 percent, the monthly CPI inflation was announced at 2.61 percent. This leads to a short-term record level of 15.39 percent for the annual CPI inflation.

Short-term record; because we will witness even higher inflation turnouts in the next few months.

The core inflation tells the reason why.

The monthly core inflation is up 1.81 percent leading to an annual rate of 14.6 percent. Such a level of course foretells that the headline CPI inflation is not likely to stabilize or turn its head southwards as long as the core inflation trend is going north as it is now.

Domestic producer price index (D-PPI) increased by 3.03 percent bringing the yoy level to an astounding 23.71 percent. Moreover, the sub-sector manufacturing index price hike at 3.16 percent yields to a sizable yoy inflation of 24.10. Not surprisingly, the sharp increase in the production costs will be feeding the consumer price inflation in the months ahead.

Looking at the sub-sectors of CPI, other than the clothing sector which has posted negative inflation due to seasonal sales, all the remaining are on the positive side. Food price inflation recorded a shocking spike of 5.98 percent on monthly basis despite the fact that now is the agricultural production season in Turkey; carrying the yoy food price inflation to 19 percent!

Lira’s depreciation and, of course, the rising oil prices have also hit the household goods and transport sectors. The monthly increase in household goods prices was 2.24 percent (18.91 percent yearly) and the monthly increase in transport prices was 2.66 percent; 24.26 per cent on an annual basis!

Now what?

As mentioned above, the increase in inflation will continue. The 500 basis points interest rate hike only served for lira to earn relative stability or in other words only halted the rate of blood loss. Considering the global financial backdrop and Turkey’s economic maladies; towards the end of the summer, we will see lira at 4.80 levels against the dollar;  at around 5.0 by year-end and towards 6.0 in 2019.

Oil prices, if stabilized around 80 dollar per barrel, could partially reduce the pressure on inflation after the end of the year. However, among the oil sector experts, it is not uncommon to read comments that oil prices are expected to rise further due to global demand, inventory levels, the Iranian problem and OPEC’s production plans.

As a result of chronic structural problems in the agriculture sector and unsustainable agricultural policies, food price declines are not easy beyond seasonality; and that would only be short term. In the manufacturing industry, the ongoing rise in costs will cause the current inflation storm to continue.

The expected economic contraction in the third quarter and the slow growth- recession- in the horizon will combine to result in a much more challenging wave of inflation. Due to cost-side pressures, inflation will remain high for some time to come despite weakening domestic demand.

June inflation details tell us that in the July-August period, the annual headline CPI inflation will march towards 18 per cent. Speaking for the end of the year, consumer price inflation of 14-15 percent is now realistic. Thus, it is not a surprise that interest rates will continue to rise as an adapter to this high inflation; with perhaps the central bank of Turkey delivering another 200 basis points rate hike.

Not so happy days are ahead of Turkey looking at the flow of economic data. The government’s hints about having early local elections in November 2018 rather than having them on March 2019 is not boding well with the current macroeconomic problems of Turkey.

GA

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