Turkey’s April inflation rises more than expected

Turkey's monthly inflation in April stood at 4.1%, above the market consensus of 3.2% (and our call of 2.9%), while annual inflation recorded a marked increase to 32.4% from 30.9% a month earlier – above the Central Bank of Turkey's 16% target and forecast range of between 15-21% detailed in its latest inflation report. This shows a significant adverse impact on disinflation, and food, housing, and transportation were the key drivers for the negative surprise in the headline rate. Core inflation (CPI-C) rose by 3.5% month-on-month, leading to a slight increase in the annual rate to 29.8%. Meanwhile, the central bank's managed currency regime, alongside modest nominal lira depreciation in recent months, limited the increase.

In April, PPI stood at 3.2% MoM and rose to 28.6% year-on-year, maintaining the uptrend seen in the last three months. In addition to refined petroleum products, food products, crude oil & natural gas, and chemicals were the major drivers of the April PPI increase, likely reflecting the impact of the US-Iran war on some industrial materials and administrative pricing decisions. Global commodity prices – particularly oil prices – in the current geopolitical backdrop will remain the key risk factors for the PPI trend in the near term.

Preliminary seasonally adjusted data, published by TurkStat and closely monitored by the CBT, indicates that the underlying inflation trend in three-month moving average terms recorded across the board increased in the headline, core and services, implying challenges to disinflation in the current environment.

A breakdown of the data shows that:

• The food group made the largest contribution to the headline (0.95ppt), driven by both unprocessed and processed food. Annual inflation inched up to 34.6% vs the CBT’s expectation of 19% for this year.
• The housing group was another contributor (0.90ppt) on the back of administrative price hikes in electricity and natural gas. The key issue worth mentioning in this group is rents, which play an important role in persisting service pricing pressures. Rent inflation dropped to 51.2%, with a further deceleration in the monthly pace compared to the CBT's forecast of a decline to the 30-36% range this year.
• The transportation group followed (0.73ppt) with adjustments in energy prices and transportation services. The sliding-scale tariff mechanism reinstated by the Ministry of Finance has absorbed a significant part of the oil price shock and reduced the impact on the monthly figure.
• Clothing, catering services and household equipment were other items that weighed on monthly inflation. This implies an across-the-board increase in subgroups.

As a result:

• Goods inflation rose to 28.2% YoY, while core goods inflation, recording a slight increase, has remained in the 16-17% range, given the CBT’s tight grip on the exchange rate supporting disinflation in this group.
• Services inflation was flat at 40.3% YoY, remaining elevated and demonstrating the extent of inertia in this area.