February CPI inflation at 2.27% MoM came well below expectations, bringing the annual rate down to 39.1% from 42.1%
February CPI inflation came in at 2.27%, in line with our 2.3% forecast but significantly below the median market expectation of 3.0%. As a result, annual CPI inflation declined from 42.12% to 39.05%. Core CPI inflation (Group C) stood at 1.80% MoM (Feb-24: 3.57%), bringing the annual rate down from 42.6% to 40.2%.
On the producer side, D- PPI inflation remained relatively contained, supported by currency stability and moderating global commodity prices, registering 2.12% MoM (Feb-24: 3.74%). The disinflation trend in D-PPI inflation, which started from 57.7% in May 2024, persisted, with the annual rate declining further from 28.5% at end-2024 to 27.2%.
The adjustment in the medical co-payment fees pulled down CPI inflation by nearly 1.0 percentage point
Among the subcomponents of February inflation, the most notable factor was the 4.4% decline in healthcare prices. We calculate that the partial reversal (retroactively) of the mid-January increase in medical copayment fees pulled down CPI inflation by nearly 1.0 percentage point, aligning with our initial forecasts. While food inflation came in at 3.2%, exceeding our 2.5% estimate, the sharper-than-expected decline in clothing inflation (-5.3% vs. our forecast of -1.0% to -1.5%) ensured that headline inflation was exactly in line with our projection.
No progress on services front
That said, a closer look at the data reveals that services inflation remains persistently high and continues to show resistance to the disinflation process. Despite the decline in healthcare costs, services inflation stood at 3.6%, indicating that price pressures in other service components remain elevated. For instance, had the increase in medical co-payment fees not been reversed, we calculate that services inflation would have been around 7.0%, following a 10.3% monthly outcome in January.
Inflation in durable goods and other core goods remained subdued, coming in at 1.1% and 1.3% MoM, respectively. Annual inflation in these categories stands at 19.6% and 27.0%, significantly below headline inflation, supported by the real appreciation of the Turkish lira. In contrast, services inflation—the most rigid component—remains elevated at 59.8% YoY.
Clothing inflation has exhibited a notable divergence since late 2021. Given its distinct divergence compared to other components, we believe that clothing inflation warrants a separate discussion. As in January, clothing inflation in February remained well below expectations and historical averages (February 2021-2024 average: 0.0%), recording a sharp decline of -5.3%, which pulled headline inflation down by approximately 0.4 percentage points. Since November 2021, TurkStat data reveals that cumulative CPI inflation has reached 377%, whereas cumulative clothing inflation has been significantly lower at 127%. Over the same period, clothing inflation as reported by the Istanbul Chamber of Commerce stands at 485%.
The CBRT is likely to continue its rate-cut cycle with 250bps reductions in the next 2-3 meetings
Despite persistent pressures in services inflation, the market is likely to focus more on the sharp downside surprise in February inflation and the decline in YoY inflation to around 39%, as evidenced by today’s market reaction. This reinforces the likelihood of a 250 basis-point rate cut at Thursday’s MPC meeting. We maintain our forecast that CPI inflation will decline to 38% in March and further to around 33-34% by June. This trajectory supports expectations for additional 250 basis-point rate cuts at the April and June MPC meetings.
By Serkan Gonencler, Chief Economist, Gedik Investment
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