Turkey’s Inflation Turnaround Is Arriving After Peak at Over 75%

(Bloomberg) -- Turkish inflation probably decelerated for the first time in eight months, ushering in some relief from a cost-of-living crisis that saw price increases top out above 75%.

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With domestic demand beginning to sag, data due Wednesday will show annual inflation slipped to 72.6% in June, according to the median forecast in a Bloomberg survey of economists. Monthly price growth, the central bank’s preferred gauge, was probably the slowest in over a year at 2.2%.

Officials are optimistic that the letup will mark the start of rapid disinflation following an aggressive monetary tightening cycle that raised the key interest rate by over 40 percentage points to 50% in less than a year.

Still, many economists see inflation ending the year above the central bank’s goal of 38%, with a steep price slowdown in July and August driven largely by the statistical effect of a high base from 2023.

“Inflation has reached the peak and we expect strong disinflation over the upcoming months — thanks to slowing domestic demand,” Deutsche Bank AG analysts including Christian Wietoska said in a report. The headline rate is set to reach “the low 50s” by the end of August, they said.

Investors are closely watching how the deceleration unfolds as they pile into local assets. The trajectory ahead will also determine when rate cuts move back to the agenda of policymakers who’ve been telegraphing a hawkish message by warning their approach will remain tight “until a significant and sustained decline in the underlying trend” of monthly inflation.

Treasury and Finance Minister Mehmet Simsek said Monday it was “important” for inflation to slow below 42% — the upper range of the central bank’s year-end forecasts but still about eight times the official 5% target rate.

What Bloomberg Economics Says...

“We expect favorable base effects to play a large role in short-term inflation moves – especially in July and August, when we see the annual rate tumbling by around 10 percentage points in each month. Even so, while Turkey’s inflation crisis will ease, we expect elevated price gains to remain a problem in the medium term. We estimate year-end inflation at 43%, well above the central bank’s 38% forecast and outside its 32%-42% projection band.”

— Selva Bahar Baziki, economist. Click here to read more.

“The deterioration in pricing behavior and the rigidity in services inflation are challenges for the period ahead,” said Muhammet Mercan, ING Bank’s chief economist for Turkey. “We expect the central bank to maintain a tight stance.”

While inflation expectations are falling among market participants, the outlook of households is proving more stubborn, with price growth seen at 71.5% a year from now.

Unanchored expectations can fuel front-loaded spending if consumers believe prices will accelerate further in the future. The central bank has said domestic demand still at “inflationary levels.”

Tighter policies are trickling through to the economy.

A measure of Turkish manufacturing activity compiled by the Istanbul Chamber of Industry and S&P Global has been below the 50-mark that separates expansion from contraction for three months, with companies raising their selling prices in June to the least extent in four and a half years.

Moving forward, the focus will be more on the fiscal efforts made to complement the central bank’s approach. Until now, expansionary measures like an early retirement plan and strong wage growth at the start of the year have “limited or diluted the effect of policy tightening,” said Barclays Plc economist Ercan Erguzel.

--With assistance from Joel Rinneby.

(Updates with analyst comment in fifth paragraph.)

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