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Turkey: Lower-than-expected September inflation

CPI recorded a 0.18% MoM change last month, lower than consensus at 0.66%, pulling annual inflation down to 7.23%. The continuing downward correction in food prices and supportive seasonality in clothing prices were the major drivers. Annual core indicators, on the other hand, maintained an improvement trend. CPI increased by 0.18% in September, lower than the market consensus at +0.66%, pulling annual inflation sharply down to 7.28% from 8.05% a month ago. This is attributable to a further downward correction in food prices after a marked drop in August as well as more than expected seasonal price declines in clothing, while the recent tax adjustment in fuel prices limited disinflation. The Domestic Producer Price Index (D-PPI), on the other hand, rose by 0.29%, while annual inflation dropped significantly to its lowest level since Apr-13 at 1.78%, from 3.03% in August, indicative of relatively subdued producer-driven cost pressures on consumer prices. In the breakdown, recent increases in energy prices pulled coke and refined petroleum products higher, while the basic metals group recorded price declines and contributed a benign reading in September.

In the breakdown, food prices have been on a roller-coaster ride this year with a significant drop in the last two months following an upsurge between May and July. Recording the lowest September reading in more than 10 years, the food group pulled the headline down by 20bp. Unprocessed foods, once again determined the dynamics with a significant downward correction, pulling the annual reading in this group down to 4.2%. The other driver was clothing, recording the best September reading since the start of inflation series in 2003, providing a -31bp contribution on the back of supportive seasonality.

On the flipside, the transportation group stood out as the major positive driver with 46bp, attributable to adjustments in fuel taxes. The other groups, with the exception of entertainment and cultural activities that slightly lowered the monthly figure, recorded contributions of 1-8bp to the headline inflation. Among core indicators, prices in the I indicator (I = CPI excluding all food & beverages, energy, alcoholic drinks & tobacco, gold) recorded a 0.14% change. As a result, annual inflation in this indicator maintained its downtrend and stood at 7.69%, the lowest since Aug-15. Relatively benign currency movements this year and the decelerating cumulative exchange rate effects from the last year contributed to the September reading. Assuming a continuation of ongoing TRY stability, core inflation is likely to decline further before year-end, though remain above the CBT’s upper band of uncertainty range at 7.0%. Despite benign data in the last two months, average annual inflation has continued to fluctuate in the range of 7.5-8.0% for a long time. Upside risks remain in our view given the volatile nature of food prices likely to be pressured by the removal of Russian sanctions and ongoing macro-prudential easing by the CBT and the BRSA. On the other hand, the slowdown in domestic demand contributing to the gradual fall in core inflation and further downward correction in the food group can be supportive for the inflation outlook.