Fast and furious: Turkey’s May inflation accelerates

Turkey’s consumer price index (CPI) increased by 11.39% annually and 1.36% monthly in May compared with 10.94% yoy in April. On the twelve months moving averages basis CPI is now at 12.10%.

More importantly, the core inflation (Index C: CPI excluding energy, food and non-alcoholic beverages, alcoholic beverages, tobacco and gold) rose to 10.3% from 9.9% in April.  Such a spike of course follows the Turkish lira’s rapid depreciation against the USD despite the catastrophic drop in domestic demand.

As for the reasons of the spike in May CPI inflation, the tobacco tax hike and the tax hikes imposed on imported goods could be blamed.  The rather unjustified drivers of the May inflation are the price hikes observed in transportation and in clothing goods. 

With 10.3% core inflation, 11.4% headline CPI; the question of course comes to whether the central bank would be brave enough or carefree enough to deliver the further rate cuts it intends to do from the current policy rate of 8.25%.  The bank has been betting on a surge of flows to emerging markets amidst the extraordinary quantitative easing round along with COVID-19.  At home, the drop in the price of oil and the wounded domestic demand will be offsetting the lira depreciation according to the central bank of Turkey. The bank in fact expects the end of 2020 CPI inflation at 7.4%, revised from 8.5%; laying the ground for more rate cuts.

This has not been the case in May 2020 and yet the central bank appears ready to continue with the easing cycle upon the pressures stemming from the political front. Thus, one should expect further lira weakness and of course more rigidity in inflation; resisting to get stable in single digits.  

Looking at the yoy performances, the lowest annual increase was 2.98% in communication while recreation and culture with 3.74%, transportation with 6.69% and clothing and footwear with 7.68%.  In contrast the outliers were alcoholic beverages and tobacco with 21.41%, miscellaneous goods and services with 20.86% and housing with 14.45% all on annual basis. 

As for the monthly figures, the lockdown measures took their toll on the hotels, cafes and restaurants segment with a limited increase of 0.16% and on non-alcoholic beverages with 0.24%. Despite the halt in the economic activity, in May 2020, there was no main group that indicated a decrease. On the other hand, clothing and footwear with 6.85%, transportation with 3.30% and miscellaneous goods and services with 1.92% were the main groups where high monthly increases realized.

On the D-PPI front, on monthly basis the increase was 1.54% in May 2020 and by 6.15% year-to-date.

D-PPI in four main sectors of industry increased by 3.63% for mining and stone quarrying, increased by 4.98% for manufacturing, spiked by 14.49% for electricity, gas, steam and air conditioning and increased by 6.61% for water supply, annually.

The indices of main industrial groups; increased by 6.09% for intermediate goods, increased by 14.90% for durable consumer goods, increased by 9.01% for non-durable consumer goods, decreased by 11.92% for energy, increased by 10.27% for capital goods, annually.