Will inflation stay at double digits?
We do not share the opinion that inflation will stay in the low doubledigits for a while to come, and go from there either north or south. It is true that we have seen yet another high consumer price index (CPI) print, and producer prices are at a long-term peak, mostly due to the exchange rate pass-through. However, equilibrium still lies between 8 percent and 9 percent in our opinion, as far as the year-on-year 2017 estimate is concerned.
That said, we are not that contrarian. Simply, we assume that monetary policy will tighten as the U.S. Federal Reserve moves along the path of a projected rate hike and balance sheet contraction, and the Central Bank of Turkey will have to respond quickly and adequately. After all, next week there is a referendum, after which there will be plenty of room to adjust.
Food prices contributed a lot to the March print with a month-on-month rise of 1.93 percent. This will not continue. Health and education are also high, both monthly, annually and in terms of averages, and this is the sticky part of Turkish inflation. However, we predict that the April print will be the last datum to reveal the impact of the lira’s depreciation.
Average inflation stands at 8.21 percent. This is not necessarily a means towards which the
CPI will revert back, but it does provide a benchmark. For inflation to lose contact with its past, a further depreciation shock, a jump in world commodity prices or a credit and government expenditure of unexpected magnitude should happen after the referendum. Do not forget that a sizeable component to inflation is the political business cycle in this country.
In terms of momentum, we will see a rest after April since the pass-through effect basically started in December 2016, and April will be the fifth and last month when it still passes through to the index. Until August, we shall have favorable base effects, since the February and March CPI were negative in 2016 and thus provided a strong negative base effect in the same months of 2017.
1.93% increase in food prices will not continue
9.5% inflationinfl expected by theth end of july
CONSUMER PRICE INDEX- March