Inflation is likely to remain neutral

Inflation is a key variable regardless of its role in monetary policy decisions.

CPI rose to 10.13% annually, and producer prices reached 15.36%.

The February CPI print of 0.81 % surpassed the market consensus estimate of 0.50% by a wide margin. Will this trend continue?

We think the answer is no. First, consider the 12-month MAs (moving averages). It points to a stabilization around 8% per annum. Second, this period includes currency shocks, and therefore the pass-through effect was in place.

The pass-through coefficient is around 10% for the CPI, and most of it has already been realized. We expect the pass-through to fade away by April. Third, the pass-through has always been higher –in fact much higher- for producer prices. However, the causality between the two inflations has been broken, and producer prices reflect less on consumer prices compared with the past decade. To put it differently, profit margins have been hit already and we may have reached a satiation point.

We almost knew that the CPI would hit 10%. We were not surprised. We continue to see the 12-months average inflation at around 8%. Given the low level of demand, barring any exogenous shock, this is also our current forecast for the yearend. Inflation is more likely than not to remain neutral from the viewpoint of interest rate determination than not, going forward.

We know from a

Central Bank of Turkey study that the magnitude of the pass-through from oil prices to Turkish CPI inflation has amplified over the last 15 years. However, most of this effect is already in the prices since oil prices have already made their most significant hike. We witness this effect in the transportation sub-item.

Unprocessed food prices are also a very important source of volatility. Whether they revert to the mean is an academic question, and there are lots of hypotheses to be tested on that score. However, even if they do –as they do for some EU countries- the reversion is probably non-linear and asymmetric over the business cycle. Unless such prices follow a global secular rising trend, we factor in very little effect for 2017.