Turkey’s inflation rate fell for the first time in eight months, but it slowed faster than expected from a peak in May and consumer prices began to slow sharply over the summer. Data released on Wednesday showed annual inflation fell to 71.6% in June from 75.5% in March. Monthly inflation, the central bank’s preferred measure, rose to 1.6%, the lowest in more than a year.
No economist surveyed by Bloomberg had predicted such a sudden slowdown. Analysts’ median forecast was for an annualized growth rate of 72.6 percent, or 2.2 percent per month. “The de-inflation process has begun,” Finance Minister Mehmet Simsek said in a statement about X.
Officials are optimistic
Turkey is turning the page on two years in which one of the world’s fastest price increases has severely squeezed the cost of living. Officials are optimistic that the easing will mark the start of rapid disinflation after an aggressive monetary tightening cycle that saw key interest rates rise by more than 40 percentage points to 50 percent in less than a year.
Investors have flocked to local assets, closely watching how the slowdown plays out.Inflation could slow to “50 percent or slightly lower” in August, said Tufan Kommert, director of global markets strategy at BBVA in London.”Going forward, the fall in inflation will likely slow as positive base effects start to disappear, but the effects of tighter monetary policy and therefore the economic slowdown will be more effective,” Kommert said.
“We’re going to finish the year at over 38 percent.”
Still, many economists believe inflation will finish the year above the central bank’s 38% target, with the statistical impact of the high levels in 2023 being a sharp slowdown in prices, mainly in July and August. Price growth in Istanbul, Turkey’s commercial capital, has not slowed at the same pace seen across the country. Retail inflation in the city was little changed on an annual basis in June compared with May, and slightly down on a monthly basis, to 3.4%, according to the Istanbul Chamber of Commerce.
Officials pointed to high and persistent services inflation and warned that “inflation expectations, geopolitical risks and food prices are sustaining inflationary pressures,” according to minutes of the central bank’s last interest rate meeting. Simsek said in a statement earlier this week that it was important for inflation to stay below 42 percent, at the high end of the central bank’s year-end forecast but still about eight times the official 5 percent target rate.
“That would create the illusion of disinflation.”
“Last year’s price momentum means annual inflation will be lower in the coming months, creating the illusion of disinflation,” Eric Myerson, chief emerging markets strategist at SEB AB, wrote in an article published on X, adding: “We will keep an eye on other inflation measures.”
Uncertain expectations could encourage frontloaded spending if consumers believe prices will accelerate further in the future. The central bank said domestic demand remains at inflationary levels. Nevertheless, the tighter policy is reflected in the economy. A gauge of Turkish manufacturing activity compiled by the Istanbul Chamber of Industry and S&P Global has remained below the 50 mark that separates expansion from contraction for three consecutive months, while companies raised sales prices to their lowest level in four and a half years in June. Barclays economist Ercan Erguzel said the impact of the policy tightening has so far been limited or diluted by expansionary measures such as early retirement schemes and strong wage growth at the start of the year.
