With lower-than-expected October inflation data and a realistic inflation report, the Central Bank of the Republic of Türkiye (CBRT) restored confidence. The comments made and reports written after the Inflation Report meeting show that the CBRT is on the right track to closing the credibility gap.
October’s consumer inflation came in at 3.4 percent month-on-month, well below market expectations (4.0 percent) and in line with the Is Yatirim forecast (3.3 percent). Core indicators show that the increase in goods prices slowed sharply and non-rental services inflation started to join this process.
The slowdown in the global economy, the decline in non-energy commodity prices, and the slowdown in domestic demand due to the policies implemented will pull inflation down to the 3 percent to 3.5 percent range in the coming months.
However, a bumpy disinflation process awaits us due to base period reasons and deterioration in pricing habits.
Natural gas consumption exceeding the free-of-charge limit will put upward pressure on inflation in November, while the minimum wage adjustment, automatic tax updates, and delayed increases in service prices will put upward pressure on inflation in January.
CBRT forecasts that annual inflation will start to decline after peaking in May due to the low base effect, and close the year at 36 percent. Due to geopolitical risks and uncertainties regarding administered prices, the Central Bank’s lower and upper levels are in a wide range of 30 percent and 42 percent.
The assumptions used by the CBRT in reaching its inflation forecast are more realistic than in previous years. The Brent oil forecast of 89 dollars for 2024 is 5 dollars above the futures markets. We find the 31 percent increase in food prices too optimistic. We foresee food inflation above 35 percent due to the increase in agricultural production costs and wages: In case of risks such as a cold and dry winter, food inflation could easily exceed 40 percent. More important is the deterioration in pricing habits. We do not expect a rapid improvement in pricing habits before the economy slows down significantly.
Our year-end forecast is 42 percent, which is in the upper range of the CBRT. If the downward trend in energy prices continues, the adjustment in minimum wages is limited and the deteriorated pricing habits improve rapidly, we will gladly lower our inflation forecast.