Turkey: Rising inflation challenges in June

June inflation, which was significantly higher than expected at 1.1%, further increased on an annual basis to 12.6% from 11.4% a month ago.

Annual core inflation also recorded a jump to 11.6% on the back of the monthly reading, which was well above the long-term June average. This suggests further pricing pressures despite weak demand conditions.

In the breakdown, we see 1) an increase in annual goods inflation to 12.9% driven by energy, as oil prices continued to rise last month, while core goods saw across-the-board increases in sub-items such as clothing and durables 2) services inflation has remained in check since February, rising to 11.8% despite relatively benign rent inflation which recorded another decline in June.

The Domestic Producer Price Index (D-PPI) also changed direction and went up to 6.2% from 5.5% a month ago, mainly reflecting the impact from commodities. The data still implies lower producer-price-driven cost effects, but risks are also building on that front.

Regarding the main expenditure groups:

• As expected, transportation pulled the headline up by 67 basis points, thanks to a continuing recovery in energy prices, while price increases in automobiles also contributed to the increase in this group’s monthly figure. As a result, inflation here jumped to 11% from a markedly low level of 6.7%.
• Another key contributor was restaurants and hotels, providing a 24bp contribution to the headline, as prices rose 2.83% in June, a record since the inception of the series. After benign readings in recent months due to transitory conditions arising from the pandemic, we see a marked adjustment in June.
• The food group turned out to be the only item that dragged the headline down, by 39bp, though a pick-up in fresh fruit and vegetables, as well as unfavourable base effects from last year, limited the extent of the drop.
• Among the remaining groups, contributions to the headline floated in a 5-to-10bp range, showing broad-based prices increases last month, while clothing stands out with a 1.2% month-on-month change. This is close to the highest level seen in previous June readings, with an 8bp impact, pulling annual inflation in this group from 7.7% to 10.7%.