Turkish inflation drops sharply in May

In May, Turkey's CPI inflation stood at 1.53% month-on-month, coming in lower than the consensus estimate of 2.0% and our expectation of 2.2%. This was largely due to moderate price increases across both food and non-food categories. As a result, annual inflation, which has been on a downward trend for the past year, saw a sharp drop to 35.4%, down from 37.0% in the previous month. However, it remains above the Central Bank of Turkey’s (CBT) unchanged year-end forecast of 24%, which falls within the projected range of 19–29% according to the latest inflation report release. While inflation rose by 3.4% in May 2024, the five-year average for May in the 2003-based index was just 1.7%. This suggests a strong base effect, reinforcing the continued decline in annual inflation.

The PPI increased by 2.5% MoM, driven mainly by food products and utilities. Annual producer inflation reached 23.1% year-on-year, marking the first monthly increase in a year. This indicates that despite a slower pace of currency depreciation at 1.9% MoM in May, the sharp currency basket (50:50 EUR/USD) increases of 6.5% MoM in March and 3.9% MoM in April led to a stronger pass-through effect, pushing prices up. However, cost pressures remain under control due to the CBT’s continuing grip on the exchange rate, with the FX basket rising by around 25% YoY as of May.

Core inflation (CPI-C) rose by 2.4% MoM, bringing the annual rate down to 35.4%. Preliminary seasonally adjusted data, set to be published by TurkStat and closely monitored by the CBT, indicate an improvement in underlying trends. The surge seen in March and April has reversed, showing widespread progress, particularly in goods.

Breaking down the data:

• The housing group made the largest contribution to inflation (0.48 percentage points), driven by water fee adjustments and persistently high rents.
• The clothing group added 0.41ppt due to seasonal factors.
• Transportation lifted inflation by 0.4ppt, mainly due to car price adjustments following currency depreciation.
• On the other hand, the food sector reduced inflation by 0.18ppt, thanks to price declines in unprocessed foods and stable processed food prices.
• Communication services also contributed negatively, with falling telecom service prices helping to ease inflation.

As a result:

• Goods inflation dropped to 28.7% YoY, while core goods inflation stood at 20.0% YoY.
• Services inflation, more influenced by domestic demand and wage increases than currency fluctuations, continued to decline. It reached 51.2% YoY, its lowest level since mid-2022.