Turkey’s annual consumer price index (CPI) inflation rate very slightly edged up from 20.3% y/y at end-2018 to 20.35% y/y in January due to a jump in food prices, the Turkish Statistical Institute (TUIK) announced on February 4.

A Bloomberg poll had predicted that the headline figure for the first month of the year would remain unchanged.

The current market consensus is that Turkey will see the annual CPI figure stay above 20% across the first half of this year, prior to a decline caused by base affects.

The official food inflation figure jumped from 25.11% y/y at end-2018 to 30.97% y/y in January due to booming fresh vegetable prices which stemmed from unfavourable weather conditions. Annual inflation in the prices of alcoholic beverages and tobacco during January was observed at only 2.63% by TUIK, up from 2.39% at end-2018.

Health pricing pressures turning critical
The official health prices inflation figure rose by 17.99% y/y in January from 16.70% in December, TUIK data also showed. Turkey’s health system has been quietly coming to the fore as potentially producing a new critical situation for the country, to add to the dire picture created by surging food prices.

About 500 medicines are currently absent from the Turkish market, Erdogan Colak, head of the Turkish Pharmacists’ Association, told local daily Hurriyet on February 4.

Around 60% of medicines absorbed by the Turkish market are imports, Cenap Sarialioglu, head of Istanbul pharmacists’ association, told the newspaper.

The euro rate for medicine distributors is stable at TRY2.6934 but it will be revised on February 19 by the health ministry. The Turkish lira trades at around 6 against the euro on the financial markets.

The pharmaceuticals industry has demanded a 35% rise in the euro rate but the government plans a 15% rise to around TRY3, sector representatives told Reuters on February 4.

Meanwhile, domestic producer price inflation (PPI) in December remained more than 1.5 times higher than the headline CPI figure despite falling for a fourth consecutive month. It was recorded at 32.93% y/y, compared to its 2018 peak of 46.15% y/y seen in September, TUIK said in a separate press release.

Regular revisions for inflation basket
TUIK also announced on February 4 that it is applying “regular yearly revisions” to its inflation basket. Accordingly, the statistical institute increased the weighting of food and non-alcoholic beverages to 23.29% from 23.03% in 2018. It also added prepared meat dishes, canned fish, ready-made milky sweets, dill, spearmint, rocket, cress and hazelnut butter as new food items in the basket, along with children’s clothes, food expenditure for pets and watches and bags for women (12 items in total).

TUIK also removed kindergarten fees from the inflation basket.  

The prices of 21 articles included in the consumer index in January 2019 did not change, while the average prices of 267 products increased, bianet reported. The prices of 130 articles fell. 

Some revisions have also been made to the PPI inflation basket, according to a separate TUIK statement.

“We expect food inflation to ease towards 17% in 2019... We believe most of the improvement will stem from the processed food side, which will be under weaker domestic demand pressure. However, the strong tourism sector will continue to weigh on food inflation, which poses an upward risk to our estimate,” Ozlem Bayraktar Goksen of Tacirler Invest said in a research note.

He added: “The clothing sector prices continued to produce positive surprises. They decreased by 8.13% m/m, sharper compared to the historical trend. In addition, the durable goods prices recorded another monthly decline (0.22%), [meaning there has been a decline for the] fourth month in a row. Key determinants of core goods prices are the course of the TL [Turkish lira] and economic activity. These two components ignited a sharp increase in core goods prices starting from the beginning of 2017. However, the weak economic activity in 1H19 and rather stable TL will stage material improvement from very high levels in 2018.”

Pressured traders cut fruit, vegetable prices
In some positive news for February’s likely food inflation, Nevzat Akcan, head of the Antalya Vegetable and Fruit Brokers Association, told local press on February 2 that the association had cut prices by 10% due to pressure, although he noted that producers would suffer from low prices.

Wholesale eggplant prices have been cut by 40% to TRY6.5, according to Akcan. Eggplant prices at supermarkets were as high as TRY20 in January, fuelling tension among Turkish consumers.

In late January, it was announced that Turkey will tackle its “onion crisis”, which has caused soaring prices and shortages, by awarding imported onions tariff-free access.

“We expect the impact of unprocessed food prices to continue in February as well. We foresee that inflation will keep to its high course in the first quarter due to the low base effect. Considering CBRT’s [Central Bank of Republic of Turkey’s] strong commitment to tight monetary policy and assuming that the TRY will remain stable, we expect inflation to follow a decreasing trend in the second half of the year and become 16% at the year-end,” Isbank Research said in a note.

“Some part of the deviation in our estimate stemmed from ‘clothing inflation’, which at -8.1% was below the previous few years’ Jan. realizations, thus also below our -6.0-6.5% projection. The clothing component led to a 0.6% fall in headline CPI inflation,” Serkan Gonencler of Seker Invest said in a research note, adding: “‘Energy inflation’ was -4.2% as a result of the discounts on electricity and natural gas prices, as well as the tap water fee. We had projected -3.0% for this component, as we did not expect the tap water fee to make such an impact. This component also wiped out close to 0.6% points from headline MoM CPI inflation.”

Inflation risks “remain tilted to the upside”
“January data shows that weak domestic demand, a stable currency and lower oil prices support the inflation outlook, though the annual figure has remained above the 20% threshold due to food prices. The risks to inflation remain tilted to the upside in the near term given the marked deterioration in pricing behaviour and the upcoming [local] elections [on March 31], which are fuelling concerns about fiscal policy while a pronounced drop will be observed in the second half of this year due to supportive base effects,” Muhammet Mercan of ING Bank said in a research note.

“The slight rise in Turkish inflation in January was driven by higher food inflation but even so, coupled with the hawkish tone of the central bank’s latest Inflation Report, it probably means that interest rate cuts are at least a few more months away [until the middle of the year when inflation is likely to fall sharply],” Jason Tuvey of Capital Economics said in a research note, adding: “Higher food inflation was largely offset by weaker price pressures in the other major price categories. Housing and utilities inflation dropped from 23.7% y/y in December to 17.2% y/y in January after gas and electricity prices were lowered at the start of this year. Transport inflation fell further, reflecting lower oil prices. Meanwhile, clothing inflation dropped to a six-month low. The central bank’s preferred measure of core inflation declined from 19.5% y/y to 19.0% y/y.”

“The jump in food inflation should prove temporary and we expect inflation to ease over the next few months,” Tuvey also said.

“In contrast to the Central Bank’s updated projections pointing more or less to a steady level in 1H19, we still expect a transitory increase in the headline in 1Q19 at around 1pp and a further slight pickup in April when the tax incentives are dropped,” BBVA Research said in a research note, adding: “Services inflation jumped carrying risks from high inertia on backward indexation.”