Although annual inflation decreases, cost factors pose a risk

Consumer prices in Turkey increased by 0.58% in July, while the annual inflation was realized as 11.8%. Economists’ participating in the Bloomberg survey and our expectation were to achieve a monthly inflation of 0.8% and 12% annually. In this regard, we see that the data is lower than the generally high expectations. Although a monthly increase of 0.58% under normal conditions is not too low for July, we see that the high increase rate of last year was effective in the decline of annual inflation. The depreciation in TRY and the much more obvious cost pressure in PPI are not yet included in the CPI.

If we look at the sub-items of inflation; We see that clothing and footwear, food and non-alcoholic beverages, which have a very intense seasonal effect, are the ones that show a decrease in monthly prices. With the seasonal effect, there is a 3.48% monthly decrease in clothing, which we are accustomed to seeing very high increases and decreases. We also observe a 1.28% decrease in the food item, which generally tends to decline or stay low, in the summer. On the other hand, food inflation maintains its high course with 12.7% annually. The items that made the most contribution to inflation upward were as follows; Transportation increased by 2.44%, various goods and services by 2.39% and household goods by 2.38%. Prices from communication, health, education, restaurants and other items such as hotels, housing increase from 0.8% to 1.8%. The increase in housing prices, which has been on the rise recently due to the increasing demand with the decrease in loan rates, has increased by 0.93% in July.

In fact, although the decline in annual inflation from 12.6% in June to 11.8% in July is apparently pleasing, the main trend in inflation's sub-items and details continues to look upwards. Both the headline inflation and core inflation, in which volatile items with high seasonality are excluded, may keep the trend and deviation range high in the coming months. The TRY depreciation, which has been effective since the second half of July, may have additional effects in terms of costs in the following months. It is necessary to closely follow the fluctuations in the exchange rates. PPI increased by 1.02% in July; It is not a good signal for the CPI in terms of the cost of the producers. Supply cuts and increased unit cost pressure due to the pandemic effect may also affect the rate of increase in final prices. In fact, a concrete argument other than the “base effect” does not appear in the general outlook of inflation in terms of improving existing conditions. When we match the cost factors, we anticipate that the withdrawal of demand inflation pressure, which is currently effective, will not cause a significant decrease in inflation.

The Central Bank stopped cutting interest rates due to concerns about inflation and also revised its expectations in the Inflation Report. We think that the risks related to these estimates are upwards and we expect double digit inflation at the end of the year. The next meeting of the Central Bank will take place on August 20. At this stage, further interest rate cuts do not seem very likely due to the general outlook of inflation and the negative real interest position.

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