Unexpectedly high food prices accelerate Turkish inflation in July

Unexpectedly high food prices accelerate Turkish inflation in July

Unexpectedly high food prices accelerate Turkish inflation in July

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Turkish inflation accelerated above expectations in July, climbing to 9.32 percent on an annual basis due to disappointing food price levels, official data has shown, marking the fourth consecutive month that the rate remained above 9 percent.

The consumer price index increased 0.45 percent from the previous month in July, raising the annual inflation to 9.32 percent, according to figures announced by the Turkish Statistical Institute (TÜİK) on Aug. 4.

The producer price index, meanwhile, rose by 0.73 percent to 9.46 percent, the statistics body announced as well.

The inflation rate has surprised markets, which were expecting the rate to total between 8.9 and 9.2 percent, betting on a decline in food price increases. However, a recent drought has continued to keep food price high, meaning inflation has exceeded analysts’ forecasts.

“Food prices, in particular, had the worst second quarter in the history of the index due to supply shocks,” the Central Bank, which kept its annual inflation forecast at 7.6 percent for the year-end, said in a quarterly inflation report revealed July 24.

“The elevated level of food prices has been the main factor limiting the pace of the decline in inflation recently,” the report also warned.

The bank had drawn a more bright future for the price changes in the upcoming period, expressing an expectation that the inflation would trend downward, particularly thanks to the appreciation of the Turkish Lira and a firm monetary policy.

During the presentation of the report, Central Bank Gov. Erdem Başçı said the impact of exchange rate volatility on inflation had started to taper off from the second quarter.

Rate reductions under question

Garanti Investment Chief Economist Gizem Öztok Altınsaç said the July inflation would have been below zero under normal conditions.

“However, the absence of an expected decline in food prices changed this table. Alcoholic beverages and tobacco increased by 2 percent on a monthly basis. Inflation is very high in the service sector as well. A remarkable inflation is visible in restaurant, hotel, communication, entertainment and culture prices. It is a very negative indicator that all items recorded an increase, not only goods,” she said.

According to Altınsaç, the situation may hamper inflation to drop as much as expected in the upcoming period as well.

Highlighting core inflation has begun to rise again, Altınsaç said the recently announced data was radically different from the forecasts shared by the Central Bank for the past two to three months.
She said the conditions implied that the Central Bank “should not go for more interest rate reduction.”

In his remarks, Başçı said the bank would continue “measured and gradual” reductions in interest rates, saying financial markets were pricing in a reduction of 50 basis points (bps) over the next three months.

The bank has trimmed its main interest rate by 175 basis points since May despite stubborn inflation, although it has so far resisted the even deeper cuts called for by Prime Minister Recep Tayyip Erdoğan as he gears up for the Aug. 10 presidential election.