One month after Turkey's president Erdogan fired his statistics chief for reporting that inflation hit 36%, his current replacement must be dreading every incoming phone call after earlier today Turkey reported that annual inflation again soared more than expected, hitting a two-decade high of 54.4% in February, above the 52.5% consensus, fuelled by a crash in the lira last year and soaring commodity prices that are expected to climb even higher in coming months due to Russia's invasion of Ukraine. Month-on-month, consumer prices rose 4.8% in February, the Turkish Statistical Institute said on Thursday, compared to the median consensus forecast of 3.8%.
Core inflation increased from 39.5%yoy in January to 44.1%yoy in February, also above consensus expectation of 42.2%yoy.
Meanwhile, for the first time since the mid-1990s, Turkey's producer prices doubled in the past year, surging 105% Y/Y, and up 7.22% just in February, also reflecting the rise in commodity prices amid Russia-Ukraine tensions.
The rise in inflation was broad-based with all categories registering increases, though the rises in food and transport categories made the largest contributions. There was some moderation in sequential inflation compared with 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 elevated.
Last month's inflation was driven by food and non-alcoholic drink prices, which rose 8.41% month-on-month, while furniture prices rose 7.00%, further eroding household savings (we somehow doubt that alcoholic drinks fell in price). Annually, transportation prices surged 76%, while furniture prices rose 65%.
Inflation has soared in Turkey as the central bank, under pressure from Erdogan, has cut interest rates by 500 basis points last year. It is expected to rise further, exacerbated by a surge in gas, oil and grains prices set off by the Ukraine conflict. The bizarro easing cycle prompted by "Erdoganomics" led to a currency crisis that saw the lira crash 44% against the dollar last year, raising inflation via imports priced in hard currencies. Meanwhile, economists say rate hikes are off the cards, despite deeply negative real yields, given Erdogan's aversion of high rates. They expect authorities to respond through interventions in the forex market to keep the lira stable, and fiscal measures.
Inflation will stay close to February levels until the last months of the year, said Jason Tuvey, senior EM economist at Capital Economics, Reuters reported. "The spillover effects from the Russia-Ukraine crisis, including higher global commodity prices and potentially fresh supply chain disruptions, mean that the risks are skewed to the upside," he said in a note.
After hiking prices across the board at the start of the year, the government has implemented tax cuts on basic goods and - like its European peers - is subsidizing a significant amount of electricity bills, in an effort to soften the impact on households. The central bank said in January it expects inflation to peak around May, when it is seen rising to around 55%, but it can now throw that particular forecast in the trash as Russia's invasion has assured even higher inflation for a long time to come.
A Turkish official said upward risks on inflation were growing and energy prices would continue to put pressure on prices. "There is a picture before us that is straining the balance of the economy. Adding in the Fed's future decision, it is clear that it will be a difficult period," the official said.
The lira - which has been actively micromanaged by the government ever since its imploded to an all time low last December, forcing the central bank to spend billions defending the currency - weakened beyond 14.0 to the dollar and further depreciation risks adding more pressure on prices.
While the central bank expects inflation to fall to 23.2% by the end of the year, economists' expectations are much higher, with the median estimate at 38% in a recent Reuters poll. In a note, Goldman strategist Murat Unur wrote that going forward he expects inflation to rise further, exceed 60% in April, peak around 65% in May-June and only fall to 45%yoy by the end of the year. Goldman also sees upside risks from commodity prices and the monetary policy stance which is not geared to fighting inflation.