Turkey: Core inflation returns to single digits

In April, monthly inflation came in at 0.85%, slightly higher than the consensus and our call (0.75% and 0.7%, respectively), pulling the annual figure down to 10.9% from 11.9% a month ago. More importantly, despite higher FX volatility impacting certain sensitive items of the CPI basket like white goods and automobiles, annual core inflation also changed direction and fell into single digits at 9.9% from 10.5% a month ago, likely on the back of deteriorating demand conditions.

In the breakdown, we see 1) a decline in annual goods inflation to 10.6%, driven by energy as a result of the large drop in oil prices last month and core goods 2) services inflation, on the other hand, moderated to the lowest level since mid-2018, at 11.8%, with across the board weakness in subgroups, showing the impact of shutdowns and quarantine measures.

Regarding the main expenditure groups, among the positive drivers:

• The food group stood out as the major driver lifting the headline by 61 basis points. Also, the monthly change was significantly above the long-term April average, reflecting increasing demand under lockdown conditions and short curfews imposed at the weekends. Accordingly, we saw higher increases in both unprocessed and processed food prices.
• Another major contributor was the clothing group, with a 25bp impact on the monthly reading, though the monthly price change was very low in comparison to earlier years.
• On the flip side, as expected, transportation dragged the headline down by -27bp, thanks to the oil effect, though price increases in automobiles amid weakness in the Turkish lira limited the extent of the drop.