Thoughts on the Turkish Central Bank's latest Inflation Report

The Central Bank publishes the Inflation Report four times a year, which includes expectations and assessments regarding inflation. In these reports, it is possible to see both the information about the variables that shape the expectations for the end of the current year and the developments regarding the inflation trend for the future. In this respect, we can say that the report in question is very important in terms of guiding expectations.

The Central Bank of the Republic of Türkiye (CBRT) revised its inflation expectation for the current year upwards. Thus, the year-end inflation expectation, which was 60.4% in the previous report, was updated to 65.2%. This ratio also points to the same level as in the Medium Term Program. On the other hand, the current year-end expectation of 67.78% in the Market Participants Survey, also organized by the Central Bank, has also converged.

In the last report, the CBRT revised its food inflation forecast upwards from 71.3% to 75%. We also saw that the forecasts for the end of 2023 were updated upwards. The expectation, which was 19.2% in the previous report, became 22.3% in this reporting period. According to the CBRT, we will have to wait until the last quarter of 2024 to see the single-digit rate in inflation.

One of the important sections in the CBRT's Inflation Report is the section where the observations on cost pressure and trend indicators are included. According to the calculations of the CBRT, the PMI indices and the main trend indicators of producer prices point to a weakening tendency, although cost-based price pressures continue.

According to the report, global commodity prices excluding natural gas and the decline in international transportation costs are becoming more evident. However, the high level of natural gas prices due to geopolitical risks and its reflection especially on domestic energy prices limits a more positive outlook in producer prices.

We know that the CBRT has been holding face-to-face meetings with real sector companies for a while. Some of the findings of these meetings, called "Economic Lens to the Real Sector", also have a devoted section in the Inflation Report.

According to the aforementioned findings, despite the weakening in demand conditions, investment appetite of export-linked companies continues. Falls in global commodity prices are weakening cost pressures, but the continued rise in energy costs continues to put pressure on firms. Exporting companies have begun to be negatively affected by the negativities in the EU economy. For example, there are decreases in orders in some sectors due to recession expectations in the EU. The slowdown is widely felt, especially in the textile-apparel sector.

The report is very broad and comprehensive. In this respect, we do not have the opportunity to comment on all of them in this column. However, to summarize; on the inflation front, the most important determinants of the upcoming period will be energy prices and recession expectations.