The curious case of Turkey’s magical September inflation

Turkey’s headline consumer inflation is almost flat in September compared to August despite weaker Turkish lira which depreciated 4.8% against the dollar only in September, and more than 23% for the year.

September CPI of 0.97% monthly carries the yoy CPI inflation to 11.75% versus the August level of 11.77%.  The announced September inflation beats all the forecasts on the downside despite the new bout of TL weakness and the rising domestic demand on the back of heavy consumer borrowing.

Food price inflation at 0.66% monthly terms- making up over a fifth of the consumer goods basket- rose to 14.95% annual, up from 13.5% last month.  It stands well above the official year-end estimate of 10.5%.  Its rather tame appearance comes despite the cost side pressures, supply chain disturbances and serious structural rigidities in the sector.

Similarly, the clothing sector price inflation was surprisingly weak at -0.03% on monthly terms limiting the annual spike to 6.91%.   The news season goods on the shelves combined with strong domestic demand curiously seem to defy the cost side pressures. 

Heavily in contrast with the headline CPI inflation that stands flat, Turkey’s core inflation kept surging, and to dangerous levels. That is, Core-C (CPI excluding food, energy, beverages, tobacco and gold) rose to 11.32% as of September from the August level of 11.03% and the January 2020 level of 9.9%.

New wave of inflation in the making

Such a surge on inflation pressures has roots in the producers price inflation (D-PPI) that was at 2.65% in September only carrying the yoy level to an astounding 14.33%.  D-PPI in four main sectors of industry increased by 16.87% for mining and stone quarrying, increased by 15.52% for manufacturing, decreased by 2.62% for electricity, gas, steam and air conditioning, increased by 13.25% for water supply, annually.  The indices of main industrial groups; increased by 17.91% for intermediate goods, increased by 19.72% for durable consumer goods, increased by 12.74% for non-durable consumer goods, decreased by 4.23% for energy, increased by 21.09% for capital goods, annually.

Producer’s price inflation and core inflation figures foretell that given demand is strong enough currently with real rates in the negative territory still, a stronger inflation wave is in the making.  Hence, the highly debatable stability of the headline CPI inflation at 11.7%-11.8% is bound to break the narrow range towards 13.0-14.0% in the coming months forcing the central bank of Turkey continue with further rate hikes.  The New Economic Program’s inflation expectations of 10.5% by year-end and to 8% by end-2021 no need to say look unattainable given the inflation inertia that keep getting stronger. ,

The Turkish central bank’s next rate-setting policy council is scheduled for October 22nd and it will unveil the year’s final Inflation Report on October 28th. Unless crowned with another rate hike on October 22nd, Turkish lira is unlikely to halt its weakening trend or resume its losses recorded this year.