Turkish Food Price Spoiler Could Spell End of Inflation Slowdown

(Bloomberg) -- A runup in Turkey’s food costs is threatening to halt a broader deceleration in price growth.

Shortages last month caused by flash floods in Antalya, a hub for greenhouse farming, are making matters worse after the rapid depreciation of the lira in August raised the cost of food imports and transportation. Data due Monday will show inflation stalled in January at 20.3 percent from a year earlier, according to the median of 23 forecasts in a Bloomberg survey of economists.

If a two-month letup in inflation comes to an end, Turkey’s central bank would be even less willing to cut interest rates after signaling it remains reluctant to adjust its crisis-level monetary settings despite slight improvements in the outlook. Even as reductions in utility prices have a positive effect, the cost of food -- the largest component of the consumer-price index -- exerted upside pressure on inflation in January, according to Inan Demir, an economist at Nomura Plc.

“We expect the net effect of these forces to be a slight deceleration in headline inflation -- though admittedly the volatility in food prices poses risks to this forecast,” said Demir, who’s ranked by Bloomberg as the most accurate forecaster on Turkish inflation.

• President Recep Tayyip Erdogan announced last month that power and natural gas prices for consumers were slashed by 10 percent from Jan. 1
• Turkey is also extending reductions on special consumption and value-added taxes -- mainly targeting housing, white goods, furniture and cars -- for another three months upon their expiry on Dec. 31, according to Treasury and Finance Minister Berat Albayrak
• Annual food inflation has been near 20 percent or higher for six months; it slowed to 25.1 percent in December from 25.7 percent the previous month
• Retail food prices in Turkey’s largest city added 2.53 percent on a monthly basis in January, according to the Istanbul Chamber of Commerce

Under the central bank’s base-case scenario released last Wednesday, headline inflation will end this year at 14.6 percent, down from its previous call of 15.2 percent. Governor Murat Cetinkaya said that policy makers “will continue to maintain the level of tightness necessary to achieve single-digit inflation in the shortest period of time possible.”

Adjusted for current inflation, Turkey’s real rate is near 4 percent -- higher than the level of around 2 percent in emerging markets as a whole -- and will average about 5 percent in the rest of 2019, according to Morgan Stanley.

“The central bank now has a unique opportunity to bring inflation lower,” Morgan Stanley economists including Pasquale Diana said in a report. “This in itself warrants the continuation of a tight stance.”

©2019 Bloomberg L.P.