Turkey: Annual inflation flat, but elevated core clouds the outlook

In September, monthly CPI inflation of 1.0% was better than the market consensus and our call (1.35% and 1.1%, respectively), while the annual figure remained broadly unchanged at 11.75%. However, annual core inflation rose to 11.3% likely showing the impact of exchange rate developments.

In the breakdown, we see 1) rising annual goods inflation, to 12.1%, driven by food and durables, despite favourable base effects associated with energy and tobacco prices as well as benign clothing prices 2) services inflation retreating by 1 percentage point to 10.8% mainly due to a supportive base in transportation services.

The Domestic Producer Price Index (D-PPI), which has been on a rapid uptrend, reached 14.3% in September from 5.5% in May, showing the impact of a weak base from last year and a weak currency. The data implies growing producer price-driven cost effects on the inflation outlook.

Regarding the main expenditure groups:

• Currency weakness has impacted i) transportation which turned out to be the biggest contributor to headline inflation in September, by 29bp, given higher motor vehicle and fuel prices and ii) home appliances, with 23bp, thanks to price increases in durables and furniture.
• Pick up in unprocessed food and elevated processed food prices further increased food inflation to the highest point in a year, at 14.9%, pulling the monthly reading up by 15bp, while utilities contributed 13bp.
• Among the rest of the groups, contributions to the headline floated in a 1-to-6bp range, while the diffusion index (the ratio of the number of items with increasing prices minus the number of items with decreasing prices to the total number of items in the CPI basket) reached the highest level since the Aug-18 shock, showing the extent of pricing pressures.