November inflation data entailed a positive and a negative surprise: On the positive side, producer prices declined by 0.95%, against a consensus estimate of +0.47%. On the negative side, consumer price inflation, which was announced at 1.4% -- 0.55 pps above the consensus estimate -- evoked concern, while underscoring the difficulty of targeting headline inflation, which incorporates seasonal effects as well as exogenous factors such as oil prices and weather conditions.
Market reaction to the announcement is depicted in the first graph. The yield on the benchmark bond rose by 5-6 bps, while a negligible change was observed in the FX market in favour of the US$ against the TRY.
The appreciation of the TRY and the decline in the prices of petroleum products led to a 0.95% decline in producer prices. Inclusive of this figure, annual PPI inflation fell to 1.6%. This might be considered good news, as it could indicate that the cost of production is not rising. However, in the absence of sufficient data at hand, we are unable to make definitive statements regarding the pass through from producer prices to consumer prices.
The negative surprise pertained to the higher than expected consumer price inflation. Food prices soared by 3.27%, constituting 0.96 pps of the 1.4% increase in consumer prices. Though this could be attributed to seasonality and/or an adjustment of heretofore low food prices, it is obvious that for one reason or another, the recent increases in consumer prices have surpassed economists' expectations. The other sector to have prompted a rise in the headline inflation has been clothing, again in line with seasonal patterns. The appreciation of the TRY against the currency basket and the decline in energy prices have served to pull down inflation in the remaining sectors. Communication, transportation and leisure prices have dropped, while the inflation in restaurant prices has decelerated in line with seasonal norms.
We believe that the CPI will remain around 0.4% in December, corresponding to an annual inflation rate of 7.7%, 0.3 pps below the official target. Hence, we do not think that the Nov data will jeopardise the attainment of the year-end target. We further believe that the headline CPI will decelerate in the coming months, since neither clothing nor food price increases are sustainable. Therefore, we think that the CBT still has sufficient scope for O/N rate cuts, despite an above-expected CPI inflation reading, as the Bank may not be concerned with the seasonal spikes in clothing and food prices, which are poised to decelerate in the coming months. The Bank could also predicate a rate cut decision on the deceleration in service sector prices. These notwithstanding, we do not totally discard the possibility of the CBT keeping rates unchanged. |