Turkey’s inflation slightly falls in August, but core indicators rise

ANKARA/ISTANBUL - Reuters

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Turkish headline inflation fell as expected in August but core indicators rose and could trend higher in the coming months as a weakening lira puts upward pressure on prices.

The inflation showed an 8.17 percent increase last month from the same period a year earlier. The 12-month average inflation rate amounted to 7.42 percent as of August.

The highest monthly increase was 1.19 percent in education, but the prices of alcoholic beverages and tobacco products increased most on an annual basis with a 16.01 percent hike. The highest monthly decrease was 3.62 percent in clothing and footwear.

However,annual core inflation rose and is likely to keep doing so as the pass-through effect of a depreciating lira becomes more evident, economists said.

“The CPI came in line with expectations but the breakdown of it shows risks regarding inflation are still upwards,” said Ali Cakiroglu, strategist at HSBC.

“The depreciation in the lira and rising oil prices will pressure inflation in the coming period. We think annual CPI could exceed 7 percent at year-end.”

The Turkish central bank had forecast that headline inflation would start to fall from August onwards, after peaking at close to 9 percent in July. The bank will hold its next rate-setting meeting on Sept 17.

The central bank last month raised its overnight lending rate by 50 basis points to 7.75 percent in a bid to prevent a slide in the lira, prompted largely by worries that the U.S. Federal Reserve may soon start cutting its bond-buying program.

The lira hit a record low of 2.07 against the dollar on Aug. 28, which is around 15 percent down from its peak this year, after Central Bank Governor Erdem Başçı ruled out interest rate hikes to defend the currency.

The bank has sold $7.9 billion at foreign exchange auctions to support the lira so far this year.

“The market is focusing on weak core inflation numbers, and clear evidence now of pass-through from the weak lira,” said Timothy Ash, head of emerging market research at Standard Bank.

“Against this backdrop the hope still is that the central bank moves to normalize policy. That does not seem likely still at the moment given Başçı’s disconcerting comments last week.”

The central bank raised its inflation forecasts for this year on July 30, hiking its mid-point forecast for the end of 2013 to 6.2 percent from a previous 5.3 percent.