Turkey: Inflation remains in double-digit territory in March; renewed lira weakness clouds price outlook
Consumer prices rose 0.99% from the previous month in March, above the 0.73% increase recorded in the previous month and broadly in line with market expectations of a 1.00% increase. March’s increase reflected a sizeable 2.03% month-on-month increase in prices of food and non-alcoholic beverages, while transport costs rose at a faster clip over the previous month as a weaker lira made oil imports more expensive. All other major sub-categories recorded monthly increases expect for alcoholic beverages and tobacco, prices of which were unchanged from February.
Notwithstanding the solid month-on-month increase, inflation eased a tad in March on the back of a sizeable base effect. However, surprisingly resilient food and energy inflation limited the extent of the drop, causing the long touted base effect-driven decline in inflation through the first quarter to be shallower than expected. Inflation only moderated to an eight-month low of 10.2% in March from 10.3% in February. Favorable base effects fade away as of April, which should see inflation stabilizing in upcoming months above the double-digit threshold.
Core inflation, which excludes volatile prices such as energy and food, behaved somewhat better in March, easing to 11.4% from 11.9% in February on the back of ebbing pass-through effects from a weak lira. However, the recent depreciation of the lira, coupled with increasing concerns over Turkey’s overheating economy, should also see core inflation stabilizing in upcoming months.
A beleaguered lira, an economy growing at full throttle on fiscal stimulus and accelerating cost-push inflation should keep consumer price pressures high, risking a further deterioration in inflation expectations—which are backward-looking in nature. Against a backdrop of stickier-than-expected inflation, the Central Bank is expected to maintain a tight monetary stance in upcoming policy meetings, even as President Erdogan attempts to pressure officials to lower interest rates.