Triple-Digit Factory Inflation Stirs Up Storm for Turkish Prices

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Turkey’s factory-gate inflation accelerated to an annual 122% in April amid a global rally in commodities, likely pushing companies to pass on higher costs and signaling that the worst is yet to come for consumers.

Producer prices, an early indicator of inflation, rose the most since March 1995, staying above 100% for a third month, Turkey’s statistics agency, or Turkstat, reported on Thursday. Consumer inflation soared more than predicted by economists to an annual 70% during the same period.

Manufacturers “will not be able to fully absorb very high costs of production, driven mainly by energy prices, and will have to pass at least some of that burden to their clients, resulting in consumer prices staying higher for even longer,” said Piotr Matys, an analyst at InTouch Capital Markets Ltd., after the inflation report.

Despite the worsening outlook, the central bank expects inflation to start slowing as early as June and has previously signaled it won’t tighten monetary conditions, leaving it increasingly out of step with the global economy. 

The discrepancy exposes the lira to further weakness. The currency has already lost about a 10th of its against the dollar this year, and its depreciation quickly translates into further increases in consumer prices in Turkey’s highly dollarized economy.

The lira deepened losses after Thursday’s data and was trading 0.8% weaker at 14.85 per dollar as of 11:55 a.m. in Istanbul. 

Food, Energy

Monthly consumer inflation was 7.25% in April, a month that saw broad-based price increases. Annual energy inflation alone climbed to 118.2% from 102.9% in March, while food prices -- which make up roughly a quarter of the consumer basket -- rose 89% from a year earlier.

A core index stripping out the impact from volatile items including food and energy reached 52.4%, up from 48.4% the previous month.

In its inflation report last week, the central bank blamed faster price increases on the Russian war-induced surge in energy and food costs. 

Governor Sahap Kavcioglu said Turkey didn’t need to increase rates just because other central banks, including the U.S. Federal Reserve, are doing so. On Wednesday, the Fed delivered the biggest interest-rate increase since 2000 and signaled it would keep hiking at that pace over the next couple of meetings.

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“Inflation won’t trigger a rate hike by the central bank,” Enver Erkan, chief economist at Tera Yatirim, wrote in an emailed note last week. “The government is supportive of a low-rate policy to boost growth and doesn’t believe higher rates would slow inflation.”

The belief that higher interest rates fuel inflation is championed by Turkish President Recep Tayyip Erdogan, but it goes against textbook assumptions held by central bankers around the world.

Turkey’s central bank has held interest rates for four consecutive months this year after a cycle of cuts in late 2021. The central bank’s next scheduled interest rate meeting is on May 26. April inflation data are due for publication on Thursday.

The bank expects price increases to begin slowing down next month, but investors have questioned the monetary authority’s track record on forecasts. 

Turkey’s elevated inflation, and resistance to raising rates, have pushed its borrowing costs deeper below zero when adjusted for prices. Turkish loan growth is now well above its 10-year average. 

The inflationary impact from global energy prices has been severe, especially since the cuts late last year derailed the lira and made imports of everything from food to industrial goods more expensive. 

Turkish policy makers have mainly heeded Erdogan’s demands for lower rates since he expanded his powers with 2018 elections. Erdogan sacked three central bank governors for not toeing his line, and installed Kavcioglu, a former lawmaker of the ruling party, in March last year.

With Kavcioglu at the helm, the central bank’s key one-week repo rate of 14% corresponds to the world’s lowest -- at about negative 56 -- when adjusted for prices.

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