All set now for a substantial rate cut

TURKEY - In Brief 03 Sep 2019 by Murat Ucer

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Consumer price inflation came in at 0.86%, m/m, in August, which was notably lower than the consensus and our forecast of 1.3%. As a result, 12-month rate declined more than expected to 15% from 16.6% in July. Likewise, producer prices fell in the month by 0.6%, taking the 12-month rate sharply lower to 13.4% from 21.7% in July, with the wedge between two turning negative -- and hence, cost-push pressures having run their course (Table 1; Graph 1).Looking at the contributions to overall CPI inflation, upward pressures came from tobacco and liquor, as well as housing on the back of administered price hikes (although the latter’s contribution was less than the same month of last year), but this was more than offset by the strong disinflationary impact from transportation and food (Graph 2). Food inflation continued to ease, as food prices dropped by 0.8% in the month, m/m, once again on the back of unprocessed food prices, with the 12-month rate easing further to 17.2%, down from 18.2% in July (Graph 3).As for the underlying inflation indicators, August showed improvements on both fronts, although less so on services. Monthly core inflation (C-Index) came in at a negligible 0.06%, taking the 12-month rate significantly down to 13.6% from 16.2% in July. While monthly core inflation, at a seasonally-adjusted 0.1%, was markedly lower than the 1%-ish pace of the last few months, the sharp drop in the 12-month rate was largely driven by last year’s elevated base and lira’s turnaround, when compared with last year levels (Graphs 4-5).Service inflation was 1.1% in the month, with the annual rate declining slightly further to 14.2% from 14.6% in the previous month, but service i...