‘Disinflation begins’ as Turkish price growth finally slows down

Türkiye cheered on Wednesday as inflation eased in June for the first time in eight months, in what appears to mark the start of a long-anticipated and sustained slowdown after a year’s campaign of aggressive monetary tightening.

Annual consumer prices rose 71.6% in the 12 months to June, the Turkish Statistical Institute (TurkStat) said, slower than expected and down from the cyclical peak of 75.4% in May, the highest since November 2022.

The pace of month-over-month increases, the central bank’s preferred gauge, cooled markedly and slowed to 1.64% from 3.37% in May, below the overall market expectations, the data showed.

Officials and analysts predict a gradual slide in consumer price inflation in the remainder of 2024 following a series of interest rate hikes that lifted the central bank’s benchmark policy rate to 50% since June last year.

“The disinflation process has begun,” Treasury and Finance Minister Mehmet Şimşek said shortly after the release of the data, adding that the implied trend was consistent with the government’s year-end target.

“We will ensure a permanent welfare increase by implementing our program with determination until we reach price stability,” Şimşek wrote in a post on the social media platform X.

He said disinflation would reflect successes achieved in financial stability, a sustainable current account deficit, foreign reserve accumulation, and Türkiye’s exit from the Financial Action Task Force (FATF) global financial misconduct watchdog’s “gray list.”

Reuters, Bloomberg and Anadolu Agency (AA) surveys had all forecast that annual inflation would fall to around 72.6% in June. The Reuters poll anticipated a monthly rise of 2.22%, while the AA survey projected a 2.28 increase.

Education, housing and restaurant prices sustained the inflationary pressure last month, the data showed, underscoring the lingering cost of living that has plagued Türkiye in recent years.

After the data, the Turkish lira was 0.1% weaker at 32.5680 against the U.S. dollar, while the main Istanbul share index BIST 100 was 1.1% higher.

William Jackson, chief emerging markets economist at London-based Capital Economics, said the larger-than-expected decline in inflation in June marked the start of a new phase of the disinflation process.

In a note to clients, he predicted much steeper falls in July and August.

“Still, it’s likely to be a bumpy path down, with inflation unlikely to drop below 40% until 2025,” he wrote.

‘Time and discipline’ needed

The Central Bank of the Republic of Türkiye (CBRT) has hiked rates by 4,150 basis points in a year after authorities reversed years of loose policy following last year’s presidential and parliamentary elections.

They sought to cool demand, the main driver of inflation, flip current account and budget deficits, rebuild foreign exchange reserves and stabilize the lira.

High rates aim to make it more expensive to borrow money to buy goods or invest in new factory equipment. That relieves pressure on prices – but can also dampen growth.

That’s the tightrope the CBRT, just like other central banks, including the European Central Bank and the U.S. Federal Reserve (Fed), is trying to walk: make sure inflation is contained without pushing the economy into recession.

Bartosz Sawicki, a market analyst at Conotoxia Fintech, said the data reassured the central bank that “inflationary pressures are finally starting to ease as the U-turn in policy stance begins to bear fruit.”

“Nonetheless, further progress in eradicating the long-standing inflation problem remains in doubt,” he said, with a return to single-digit inflation before 2027 “highly unlikely.”

“Although improvement in underlying price dynamics is already underway, solving the inflation problem requires time and discipline,” Sawicki noted.

The closely watched core inflation, which strips out volatile energy and food prices and is one of the key indicators for the central bank, came in at 1.7% month-over-month, moving down to 71.4% on an annual basis.

“The decline in core inflation indicators, which reflect the underlying trend of inflation, also indicates a weakening in the trend of price increases,” said Vice President Cevdet Yılmaz.

“Our primary goal is to reduce inflation, which is the top concern of our citizens, to a minimum level. As inflation decreases, economic predictability will be ensured, and income distribution will improve positively,” Yılmaz wrote on X.

“In line with this goal, we have entered a disinflation process thanks to the monetary and fiscal policies we have implemented to combat inflation.”

Yılmaz said the government expects the decline to accelerate in the second half of the year. “By 2026, we aim to bring the inflation rate back down to single-digit levels,” he added.

Rapid drop anticipated

Monthly inflation was particularly high in the first two months of 2024, mainly due to a big minimum wage hike and other price updates, before it started to ease.

The CBRT sees a decline in seasonally adjusted monthly inflation to around 2.5% on average in the third quarter, and slightly below 1.5% in the last quarter of the year.

After the latest rate hike in March, due to a deterioration in the inflation outlook, the central bank has held steady and vowed to tighten further in the case of a significant deterioration in inflation, seeing an end-year rate of 38%.

Cumulative inflation in the first half reached 24.7%.

“For the remainder of the year, it (inflation) is expected to drop rapidly thanks to the large base – especially in July and August,” said Dutch banking giant ING.

“The extent of the decline will be determined by administrative price adjustments, just as we saw at the beginning of this month with a 38% increase in electricity prices,” it noted. Its cumulative effect on the headline rate is expected to be around 1 percentage point.

In addition to a possible hike in the natural gas price, revisions in special consumption tax on certain products in the producer price index (PPI) release for the first half of the year are set to weigh on the pace of the decline, it said.

“However, the lagged effects of monetary tightening on credit and domestic demand, together with the continued real appreciation of the Turkish lira, are likely factors that will keep the underlying inflation trend on a downward path.”

The domestic producer price index was up 1.38% month-over-month in June for an annual rise of 50.09%, the TurkStat data showed.

The data implies that cost pressures could be moderating as currency developments have been supportive lately, ING said.

“Global commodity prices – which have been on an increasing path since the beginning of this year – will likely remain the key determinant of the PPI trend ahead.”