Turkey: Food-Driven Disinflation

Turkey: Food-Driven Disinflation

At 0.38% m/m, November's CPI inflation was significantly lower than market consensus and our expectation (0.9%), mostly due to a 0.12% m/m decline in food prices. Contrary to the global food price increases during the first half of the year, domestic food prices followed a subdued trend this year, resulting in a food inflation of 2.3% from January to November. The average January-November food inflation during 2007-2011 was 10%. Accordingly, annual CPI inflation declined to 6.4% in November from 7.8% in October.

Core I-inflation declined 0.4pp to 5.7% y/y in November from 6.1% in October. The rise in houseware prices last year on the back of exchange rate depreciation provided a favourable base effect for core inflation in November. Rent inflation continued to edge up gradually, but remained in check at 5.35% y/y. Motor vehicle inflation declined to -0.18% y/y in November from 0.31% in October, mostly due to a relatively stable exchange rate. Communication inflation declined 0.8pp to 5.0%, thanks to the favourable base effect on postal services prices. Education and hotel-restaurant inflation remained flat at 4.7% y/y and 9.4% y/y, respectively.

Inflation could finish the year at 6% y/y, provided that food prices maintain the current benign outlook in December. If the authorities withdraw or postpone the tax measures on tobacco that is scheduled to take place in January 2013, downward surprises could continue in the earlier part of 2013 as well. If implemented in full, the tax increases would add 0.8pp to inflation in January. Despite the benign inflation reading and some signs that the pick up in economic activity has remained gradual, the CBRT would not take aggressive action at this stage considering the evolution of TRY. A lower inflation would also mean a less appreciated REER, which in turn could lead to a more cautious stance by the CBRT in December. On balance, while a 25bp gradual cut in the policy and o/n borrowing rate is still our main scenario for December, the odds of a non-action have also increased considerably due to recent TRY performance.

Selim Çakır