Official data revealed that annual inflation in Türkiye registered a significant decline in July, as anticipated. The momentum of what is expected to be a sustained slide appears to have gathered pace, while education, housing, and hotel prices continued to surge.
According to data from the Turkish Statistical Institute (TurkStat), the consumer price index (CPI) eased to 61.78 percent last month, slightly below expectations.
Consecutive fall in inflation
This marks the steepest drop in nearly two years and the second consecutive fall, as inflation had eased to 71.6 percent in June from the cyclical peak of 75.4 percent in May.
Consumer Price Index, July 2024
Consumer price index (CPI) increased by 61.78% annually and 3.23% monthly
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↪️ https://t.co/0pF3ZR6nvX— turkstat (@TurkStat) August 5, 2024
Monthly price growth
Moreover, monthly price growth, the Central Bank of the Republic of Türkiye’s (CBRT) preferred gauge, rose to 3.23 percent, also below expectations. In June, monthly CPI inflation was 1.64 percent.
Treasury and Finance Minister Mehmet Şimşek stated that temporary factors caused the monthly inflation rise, adding that the inflation fall will be felt more in the period ahead as a result of the government’s medium-term economic program.
The median forecast of economists surveyed by Bloomberg and Reuters was for an annual reading of 62 percent and 62.1 percent, respectively. The latter estimated monthly inflation at 3.45 percent.
Anticipated inflation drop
The annual inflation drop had been expected, mainly due to base effects. Officials and the central bank had earlier signaled they anticipated a temporary uptick in the monthly readings due to adjustments in administered prices.
Şimşek noted on the social media platform X that annual inflation is falling and “We continue to get positive results in all areas of our program, whose main objective is disinflation.” He further commented that “The decrease in inflation will be felt more in the coming period.”
In an interview on July 26, CBRT Deputy Governor Cevdet Akçay told Reuters the bank expected a burden of some 1.5 points on July’s monthly inflation due to adjustments in administered prices and taxes.
Factors contributing to inflation
Economists had said mid-year price rises in alcoholic beverages and tobacco products, as well as rises in energy prices and tax adjustments to fuel, were likely to contribute to the monthly inflation spike.
Sectoral price increases
Education, housing, health, hotels, and restaurants saw the biggest annual price increases, with education prices rising 104.5 percent from a year ago, followed by housing, which accounts for rises in utilities, at 98.48 percent, and restaurants and hotels at 76.04 percent.
Monthly price movements
Housing led monthly price increases at 8.08 percent. Alcoholic beverages and tobacco saw an increase of 5.84 percent, while clothing and footwear recorded a decrease of 2.58 percent.
Core inflation
Core inflation, which strips out volatile items such as food and energy, showed that annual gains eased to 60.2 percent from 71.4 percent in June.
Monetary policy measures
The central bank has hiked its policy interest rate by 4,150 basis points since June last year and said it is monitoring inflation risks, vowing to tighten further in the case of a significant deterioration in inflation.
The bank kept borrowing costs unchanged at 50 percent for a fourth consecutive month in July.
Government’s inflation projections
Vice President Cevdet Yılmaz stated that the government estimates inflation would fall toward the low 50s in August and gain further downward momentum in September. He also wrote on X that the government’s aim is to bring Türkiye back to single-digit inflation by 2026 and that they will continue to resolutely implement their program to minimize the increase in the general level of prices, strengthen the economy’s resilience against global developments, and permanently enhance social welfare.
CBRT Governor Fatih Karahan is set to present the bank’s fresh inflation projections this Thursday.
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Tightening financial conditions and monetary policy is set to continue contributing to the disinflation path, according to Istanbul-based Bürümcekçi Consulting. However, the support from fiscal policy measures will be less than expected, and the firm does not expect a change in policy rates in August, stating they will remain at 50 percent for a while longer.
Seasonal factors impacting inflation
Inflation traditionally eases during the summer in Türkiye, as energy consumption falls and tourism brings in foreign currencies.
The domestic producer price index was up 1.94 percent month-over-month in July for an annual rise of 41.37 percent, the TurkStat data showed.
Forecast for interest rate cut in 2025
Nicholas Farr, emerging Europe economist at London-based research group Capital Economics, stated that the large fall in headline inflation in Türkiye in July will provide some comfort to the central bank that the disinflation process remains on track. However, he added that it will take time for policymakers to be fully convinced that they can begin easing monetary conditions, and he maintains his forecast for the first interest rate cut to arrive in 2025, a bit later than most others expect.
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