Dec'05 inflation statistics released late today by the Turkish Statistical Institute (TSI) provided the first positive piece of news of 2006: consumer price inflation decelerated significantly in December, while producer prices remained on the descent. Hence, 2005 marked the fourth consecutive year whereby CPI inflation target was attained.
According to the TSI, consumer prices increased by 0.42% in Dec'05, 0.2 pps lower than the market consensus and 0.3 pps below our forecast. The CPI inflation may have been kept at 0.19%, had the government not prompted cigarette producers to raise cigarette prices, which in turn paved the way for higher tax revenues from tobacco products. The decline in food prices (we were expecting a 0.5% increase based on the 0.48% and 0.93% increases we observed in the last two years), and a lower-than-expected increase in housing (probably not due to significant deceleration in rents but due to receding heating-oil prices) were the main reasons underlying the lower-than-expected CPI increase.
The available data suggests a deceleration in some service sector prices. However, as the price hikes in sub-items have not been announced yet, we refrain from making inferences on developments in the services sector. For instance, housing prices went up by 0.44% in Dec'05. This represents a significant deceleration from the averages of the first 11 months of the year (0.82%) and the last three months (1.44%). However, assuming headline housing as a service sector and concluding that service prices decelerated significantly can lead to a major misinterpretation, as 71% of this sector pertains to tradable products, such as heating oil and natural gas. Thus, we opt to wait for the details of the inflation data, which will be announced in the third week of the month, to draw any tangible conclusions.
Producer prices have come down for the second consecutive month, thanks to the decline in manufacturing prices, which is affected by receding oil prices as well as strong TRY. Producer prices dropped in 10 of the 22 sub-sectors of the manufacturing industry. In October and November, producer prices receded in 6 and 9 sub-sectors, respectively; thus, we surmise that producer costs do not seem to pose a threat to consumer prices.
We maintain our positive stance on inflation. Although annual inflation rates could rise from the current 7.72% towards 8-8.5% due to the base effect, and ambitious inflation target of 5% may not be met due to exogenous factors such as oil prices and/or domestic factors such as sticky service prices, we believe that the downward trend in inflation remains intact. Thus, we think that the CBT still has sufficient scope for O/N rate cuts. The Bank could predicate a rate cut decision on the deceleration in service sector prices, decline in inflation expectations, as well as seemingly benign costs, oil prices and exchange rates. |