Snap3 March 2022Updated 8 months ago

Turkey: No respite for inflation as it reaches 54.4%

While the February inflation has remained on a rapid uptrend with a broad-based deterioration in pricing behaviour, upside risks remain at the forefront with the Russian and Ukraine conflict and likely spillovers

54.4%

CPI Inflation

(as of February, YoY%)

Higher

Turkey's annual CPI inflation rose to 54.4% in February, the highest in 20 years, after another higher-than-expected monthly rise of 4.8%. Inflation in the last three months, however, stood at 36.9%, reflecting the impact of worsening inflation expectations, pass-through from currency weakness in the last quarter of 2021 which can be attributed to deep monetary easing delivered by the Central Bank of the Republic of Turkey (CBT), along with large administrative price hikes. Following these developments, trend inflation which was previously in the high single digits is now estimated to be around 20%, confirming the need for policy reversal towards a more restrictive stance.

For the core indicators, both B (excluding unprocessed food, energy, alcoholic beverages, tobacco and gold) and C (excluding energy, food and non-alcoholic beverages, alcoholic beverages, tobacco and gold) indices moved up further to 47.0% year-on-year and 44.1% year-on-year, respectively, while the underlying trend for both indicators has remained elevated at record high levels.

The February Domestic Producer Price Index (D-PPI), on the other hand, is now at triple digits at 105.0%, the highest in almost three decades, reflecting a spike in cost-push pressures given wage adjustments, FX volatility in late 2021, and rising commodity prices, particularly energy.

Evolution of Annual Inflation (%)

(Core = CPI excluding energy, food & drinks, alcoholic beverages, tobacco, gold)

Source: CBT, ING
CBT, ING

In the breakdown of the CPI, goods inflation reached 62.5% given the continuing impact of exchange rate developments and higher energy prices, along with pricing pressures on other imported commodities. In this group, food turned out to be the biggest contributor to the monthly figure by 2.13ppt despite the VAT cut in certain food products from 8% to 1%, introduced in the middle of the month. Transportation ranked second with a 77bp impact given adjustments in gasoline and liquefied petroleum gas prices, while we also saw hikes on transportation services. Home appliances followed, pulling the headline figure up by 63bp with group-wide price increases. Among others, utilities and catering services provided a 23bp and 32bp lift to the monthly reading reflecting electricity price adjustments and the impact of food price pressures. Accordingly, services inflation reached 32.4%, the highest in the current 2003=100 series.

Annual inflation in Expenditure Groups

Source: CBT, ING
CBT, ING

Overall, while the February inflation has maintained its rapid uptrend with a broad-based deterioration in pricing behaviour, upside risks remain at the forefront with the Russian and Ukraine conflict and likely spillovers. Given this backdrop, escalating geopolitical risks support views for further inflationary challenges and widening external imbalances for Turkey via agricultural products and energy, either with price effects or possible trade drags with these countries.