OPINION: Turkstat losing credibility with changes to inflation basket
Bloomberg comments Turkey’s state statistics institute lowered the weighting of items including food, transportation and housing in its consumer-price basket, while raising the share of alcoholic beverages and tobacco, among others
Turkish CPI inflation soared beyond 12% in January, exceeding 3 different consensus forecasts, but this is not the real story. It would have been much higher, had Turkey’s stats agency Turkstat not made hard to explain changes to inflation basket.
Services inflation remains stubbornly above 12.0%
In Turkey’s tightly censored press and brokerage research, changes to the basket found little mention, with most reports till predicting rate cuts by CBRT. Here is a summary from Yatirim Finans Securities:
According to our estimation, “B” measure of core inflation would fluctuate around 11.0% in the first half of 2020 and later decline towards slightly below 10.0% YoY in the second half of 2020. However, we must point out that recent decline in global commodities prices and stable TRY translates into a lower than expected PPI inflation. We believe a 5.0% decline in TRY denominated unit price of intermediate goods imports (estimated so far in January) could translate into up to a 1.0% decline in headline inflation. Hence, if we observe permanently lower commodity prices and stable TL going forward, we will have to revise down our 2020-end inflation expectation to 9.0% from 10.0%.
We believe the relevant inflation reference that the Bank bases off its decisions remain at around 8.2% (2020-end inflation projection). In fact, CBRT has been confidently projecting a benign and gradual disinflationary period ahead, with services inflation converging towards CBRT’s 2020-end headline inflation projection. Hence, at its next policy meeting, we expect CBRT to lower policy rate by more gradual 75bps at the Feb 19th MPC meeting to 10.50% from 11.25%. Depending on the trajectory of commodity prices and stability of TL, the Central Bank could try lowering policy rate down towards 9.0% by June ’20. Any further easing signal from FED could also be conducive to further rate cuts by the CBRT, wrote YF research team.
Food prices could be at least twice higher than measured by Central Bank
A survey by left-wing United Civil Servants Association, a labor union found food prices rising by 25% YoY compared to 9% according to Turkstat figures. While we can’t vouch the accuracy of the figures published by the labor union, it seems clear that the cost of living of an average Turkish citizen is no longer reflected in the official inflation figures.
Bloomberg comments Turkey’s state statistics institute lowered the weighting of items including food, transportation and housing in its consumer-price basket, while raising the share of alcoholic beverages and tobacco, among others. This is only the headline. The shares of staple foods such as potatoes and onions, as well as rent were trimmed drastically, as those of cars, jewelry and baby diapers were raised. As its custos dictates, Turkstat didn’t bother to defend its choice of index. Despite changes to basket, 268 of the 418 items in the list registered price increases, attesting to the wide-spread nature of pricing pressures.
The “dirty float” in the exchange rate is also used to conceal inflationary pressures
Finally, as Central Bank head Murat Uysal openly admitted in last week’s introduction of the Inflation Report, state banks are actively intervening in the currency market, to stabilize the value of TL to diminish pass-through to inflation. Despite a negative global EM environment, higher than expected inflation and news of Assad’s army killing 6 Turkish soldiers, by 15:00 Turkish tie, dollar/TL pair hardly budged from 5.98. Such underhanded intervention is not a free ride. Supporting the FX positions of state banks might have cost Central Bank $30 bn in FX reserves since March 2019.
Turkey is rapidly heading the way of Kirshner’s Argentina, where soon private indices will replace those published by Turkstat. The belief among the public in Turkstat figures is already at all-time lows, which reduces credibility of monetary and fiscal policy, as well as –in the current context—compelling citizens to place their saving in real, rather than financial assets, styling the growth of the investable savings.
By Damon H Grande