We revise our end-2023 CPI inflation forecast to 69% from 55%
In July, we expect MoM CPI inflation to approach double digits and YoY CPI inflation to rise to 48% from 38%. USD/TL rate rose by close to 40% since the elections, and this together with various tax adjustments, has led to a significant deterioration in short-term inflation dynamics. In fact, pump fuel prices have increased by 50% compared to the end of June, and by about 30% on a monthly average basis, vegetable prices increased by about 35-40%, bread prices increased by 30%, cigarette prices increased by more than 10%, and we have also witnessed 10-20% price hikes in various products from electronics to cars, and from small appliances to home textiles. All of these actually suggest that monthly CPI inflation has the potential to reach double-digit levels in July.
On the other hand, the FX passthrough is generally reflected in services prices with a lag, and the discount season in clothing products are likely to pull down CPI inflation to some extent. Considering all these factors together, we shape our monthly CPI inflation estimate for July as 9.6%, which would mean that there will be a sharp rise in YoY CPI inflation to 48.0% from 38.2%. Yet, we should also note that the risks in our July CPI inflation forecast are on the upside.
We expect the upward trend in CPI inflation to be maintained throughout 2H23. We believe that the indirect effects of fuel price hikes, lagged exchange rate pass-through on services inflation, our expectation of additional TL depreciation, potentially new tax hikes, and most importantly, the significant deterioration in pricing behaviour, combined with the negative base effect in the same period of the last year, indicates that the upward trend in YoY CPI inflation is likely to be maintained throughout 2H23. Recall that right after the 06-Feb earthquakes, we had already shared our prediction that CPI inflation was likely to dip at around 40% by June, and then rise to 50-55% levels by year-end. This prediction was mainly based on our expectation of a sharp TL depreciation in TL and tax hikes after the elections, and partially on the upward revisions in our food and rent inflation forecasts due to earthquakes. While the post-election developments justify our predictions in this regard, we must also state that the rise in the $/TL exchange rate and particularly the significant rise in the SCT on fuel (of more than 200%) exceeded our expectations (assumptions).
Also considering the deterioration in pricing behaviour caused by all these developments and the rigidity in services inflation, an upward revision to our CPI inflation forecasts became inevitable. According to our new projections regarding the inflation path, we now expect CPI inflation to rise to around 55% by August and to 69% by the end of the year. Note also that these predictions are based on a year-end USD/TL assumption of 28.50, which may be deemed as quite conservative (optimistic) at the current juncture.
The CBRT will also update its year-end CPI inflation forecasts tomorrow with the third inflation report of the year. In the last inflation report announced at the beginning of May, the CBRT had kept its end-2023 and end-2024 CPI inflation forecasts constant at 22.3% and 8.8%. Depending on the factors mentioned above, it seems inevitable that the CBRT will also make a significant revision in its inflation forecasts for both 2023 and 2024. It may be considered reasonable for the CBRT to share more optimistic inflation forecasts than our and market expectations. Yet, we think that a forecast of below 50% for end-2023 would be seriously questioned by the market and may lead to a credibility loss for the CBRT.
Serkan Gönençler
Chief Economist
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