Turkey’s double-digit inflation here to stay

The January inflation rate came in below expectations, but on an annual basis inflation was still stuck in double-digit territory at 10.35 percent.

Most analysts now believe that inflation may remain in single-digits for a couple of months but will persist in double-digits throughout 2018 

Markets had expected consumer prices to rise by 1.23 percent in January but the actual figure announced by the Turkish Statistical Institute (TÜİK) on Feb. 5 was a 1.02 percent increase. As a result, the annual rise was 10.35 percent in the month, against expectations for an annual inflation rate of 10.59 percent. Forecasts for annual core inflation had stood at 12.23 percent but the actual core inflation rate came in at 12.18 percent.

The decline in annual inflation was mainly driven by the decline in food prices. Due to unusual weather conditions, vegetable prices, which saw a 23.6 percent year-on-year increase at the end of December 2017, fell by 6.3 percent in January. 

Calculations show that the fall in vegetable prices contributed 1.1 percent of the 1.6 percent decline in headline inflation. Due to seasonal discounts, clothing and footwear prices also declined in the month.

By looking at this data, most local and foreign analysts think the decline in inflation observed in January will not be permanent and does not herald any long-term shift. “Given that most of the components of the food basket are running in the double digits and the sharp fall is due to vegetable prices, we do not expect this fall to be long lived. We expect food inflation to eventually rise and core inflation to fall gradually,” Goldman Sachs wrote in a report on Turkey’s January inflation data. Analysts at Goldman Sachs added that they expect food inflation to eventually rise and core inflation to fall gradually. “Thus, we think inflation will be in the low double digits for most of the year,” they are quoted as saying. 

Other analysts pointed to the fact that annual food inflation was very high last year, thus a correction in food prices was widely anticipated. However, they said, the correction in January was sharper than expected. 

Meanwhile, with inflation in mind, the government at the start of this year did not raise taxes on items such as tobacco, which it had done in the past. This suggests that it is concerned about the inflation outlook.

 The depreciation of the value of the Turkish Lira has been quite limited since the start of the year, which has also played a positive role in inflation. However, due to the rise in global oil prices, fuel prices have been frequently raised, which in return has triggered price increases in several items, particularly affecting transport costs. The government reduced taxes on a number of items such as furniture, but then started to levy taxes on them again, causing their prices to rise. 

In sum, the government has tried hard but inflation has only slightly been brought down. 

Is single-digit inflation possible?

Ministers who used to say “inflation would come down to single-digits in January” now say it will drop to those levels in April. Taking the base-effect into account, it looks barely possible that inflation will drop to single-digits in April. Even if it does, it is likely to climb to double-digits in the subsequent months. Last year, consumer prices increased by 2.46 percent in January, 0.81 percent in February, 1.02 percent in March, 1.31 percent in April, and 0.45 percent in May. Prices declined by 0.27 percent in June but then rose by 0.15 percent in July, 0.52 percent in August, 0.65 percent in September, 2.08 percent in October, 1.49 percent in November, and 0.69 percent in December. 

Given the strong base effect in January last year - a 2.46 percent rise in prices – inflation was able to come down last month. But base-effects in other months are not very promising.

This is why local and international market players seem to think that inflation would remain in double-digit territory in 2018. 

Personally, I think that under the given circumstances it should be considered a success if inflation hovers around 11-12 percent this year.