It Could Be Worse… You Could Be Living In Turkey

Remember: just when you think all hope is lost and it can’t possibly get any worse… you could be living in Turkey.

Earlier today we learned that headline inflation in the biggest of all basket case countries, the cartoon republic of Turkey, rose from 61.1% Y/Y in March to 70.0% Y/Y in April, the highest print in 20 years, and above consensus expectation of “only” 68% y/y.

Not exactly shocking, but core inflation also increased, from 48.4%Y/Y to 52.4%Y/Y, slightly below the consensus expectation of 53% Y/Y and 52.9% Y/Y, respectively.

While the rise in headline inflation was broad based with all categories registering increases, the degree of the acceleration was disproportionately driven by an outsized contribution from the food category. In contrast to the previous two months, the housing and utilities category had the second largest contribution in April, followed closely by the transport category reflecting the pass-through from the uptrend in global energy prices.

Sequential headline inflation also strengthened (increased 124.6%mom annualized., compared to 100.9%mom annl. in March) but remained lower compared to December and January, as the sharp Lira sell-off in 2021Q4 led to a more front-loaded and faster pass-through to prices in these two months. Nevertheless, the underlying pricing pressures remain highly elevated and inflation expectations continue to climb higher.

More details:

• All categories registered increases and there was a broad-based rise in inflation in April. Food inflation increased sharply, from 70.3%yoy to 89.1%yoy, contributing 4.8pp to the overall increase and becoming the leading driver of the rise in inflation. Rising food prices stand in contrast to the TCMB’s expectation that vegetable and fruit prices will fall with warmer weather.

• Housing, water, electricity, gas and other fuels inflation rose from 51.4%yoy to 61.1%yoy contributing 1.4pp to the overall rise in inflation, partially due to a 29% hike in water supply tariffs in Istanbul, which hosts around 19% of Turkey’s population, and increases in gas prices. The housing and utility category registered its highest increase in January 2022 to 48.4%yoy from 28.6%yoy in December on the back of significant hikes to electricity and gas prices, followed by marginal increases in March and February.

• Transport inflation increased from 99.1%yoy to 105.9%yoy on the back of high fuel inflation and contributed 1.1pp to the overall increase. Furniture and household equipment inflation rose from 69.3%yoy to 77.6%, adding another 0.7pp to the increase in the headline number. Restaurant and hotel inflation increased from 60.4%yoy to 69.3%, contributing 0.6pp to the increase in headline inflation.

• There was a pickup in the pace of sequential inflation (from 100.9%mom annl. in March to 124.6%mom in April). Although sequential inflation is lower than it was in December and January, it is still running at a very elevated level. The median change across the components of the CPI basket and the pricing component of the PMI reveal high inflationary pressures.

The distribution of price changes around the median continues to have a right fat tail, suggesting ongoing large price increases. Services inflation rose from 36.7%yoy to 42.2%yoy, also pointing to the fact that underlying inflation is very high.

Going forward, inflation will rise even more and according to Goldman, will stay above 70%yoy until November and only fall to 60%yoy at the end of the year with the help of base effects. The central bank’s inflation projections have consistently been lower (currently at 42.8%yoy for end-2022) and the Bank continues to focus more on extending cheap credit to priority sectors while attributing rising inflation predominantly to the war in Ukraine. There is therefore significant upside risks to inflation from loose monetary policy and the utilization of heterodox measures that are not sufficient to fight inflation. The rising commodity prices add to the risks.