Turkey: Inflation remains in double-digit territory in March; renewed lira weakness clouds price outlook
April 3, 2018
Consumer prices rose 0.99% from the previous month in March, above the 0.73% increase recorded in the previous month and broadly in line with market expectations of a 1.00% increase. March’s increase reflected a sizeable 2.03% month-on-month increase in prices of food and non-alcoholic beverages, while transport costs rose at a faster clip over the previous month as a weaker lira made oil imports more expensive. All other major sub-categories recorded monthly increases expect for alcoholic beverages and tobacco, prices of which were unchanged from February.
Notwithstanding the solid month-on-month increase, inflation eased a tad in March on the back of a sizeable base effect. However, surprisingly resilient food and energy inflation limited the extent of the drop, causing the long touted base effect-driven decline in inflation through the first quarter to be shallower than expected. Inflation only moderated to an eight-month low of 10.2% in March from 10.3% in February. Favorable base effects fade away as of April, which should see inflation stabilizing in upcoming months above the double-digit threshold.
Core inflation, which excludes volatile prices such as energy and food, behaved somewhat better in March, easing to 11.4% from 11.9% in February on the back of ebbing pass-through effects from a weak lira. However, the recent depreciation of the lira, coupled with increasing concerns over Turkey’s overheating economy, should also see core inflation stabilizing in upcoming months.
A beleaguered lira, an economy growing at full throttle on fiscal stimulus and accelerating cost-push inflation should keep consumer price pressures high, risking a further deterioration in inflation expectations—which are backward-looking in nature. Against a backdrop of stickier-than-expected inflation, the Central Bank is expected to maintain a tight monetary stance in upcoming policy meetings, even as President Erdogan attempts to pressure officials to lower interest rates.
Turkey Inflation Forecast
The Central Bank of the Republic of Turkey expects inflation to end this year at 7.9% and 2019 at 6.5%. FocusEconomics panelists expect inflation to close 2018 at 9.6%, which is up 0.2 percentage points from last month’s forecast. For 2019, the panel sees inflation moderating to 8.1% by year-end.
Author: David Ampudia, Economist