Türkiye's annual inflation eased more than expected in August, as official data showed on Tuesday, sustaining a sharp slide due to base effects and food price relief and keeping the central bank on track for rate cuts in the months ahead.
Consumer prices rose 51.97% in August compared with a year earlier, the Turkish Statistical Institute (TurkStat) said, down from 61.78% in July and 71.6% in June. Inflation rose 2.47% from July to August, driven by a gas price hike, but was below market expectations.
"Disinflation is becoming more pronounced," said Treasury and Finance Minister Mehmet Şimşek.
The decline began after the annual consumer price index (CPI) touched 75% in May, the highest level since late-2022, as a more than year-long monetary tightening campaign started to bring price relief.
"Annual inflation has decreased by 23.5 percentage points over the past three months," Şimşek wrote on social media platform X.
In July, monthly inflation was 3.23%. It was high in January and February, largely due to a big minimum wage hike and new-year price updates, before slowing to some 3.2% in March and April. After dipping in June, monthly inflation rose to 3.23% in July due to mid-year price adjustments.
Excluding volatile food and energy costs, so-called core inflation rose 3% from July to August. It dropped by almost 10 percentage points to under 52% annually.
The median estimate of nine economists in a Reuters poll saw annual inflation falling to 52.2% in August. Month-over-month, it was seen at 2.64%.
Food prices see first drop in 4 years
Şimşek attributed the monthly rise in August to "temporary" factors and said the increase was 1.4% when administered prices were excluded.
The data showed that food and nonalcoholic beverage prices have declined every month for the first time since August 2020. Education prices rose 11.34% from July.
"Monthly food inflation turned negative for the first time in four years," said Şimşek.
Annual inflation was driven by education prices, which surged 121%; housing prices, which were up 101%; and restaurant and hotel prices, which rose nearly 68%. That was offset by heavily weighted food and nonalcoholic drinks, which rose almost 45%.
While cost-push pressures are easing, pricing behavior and inertia in services have been key risk factors that adversely affect disinflation, said analysts at Dutch banking giant ING.
The unit price of natural gas for residential use rose by 38% in August, the first hike in almost two years, elevating the monthly CPI figure.
The Central Bank of the Republic of Türkiye (CBRT) has hiked interest rates by 4,150 basis points since June last year, to 50%, and vowed to tighten further in the case of a significant deterioration in inflation.
Increases in the CBRT's benchmark interest rate, over time, raise borrowing costs for a range of consumer and business loans, including mortgages, auto loans and credit cards.
Is a rate cut on the horizon?
Yet given the disinflation seen in the last few months, coupled with a slowdown in economic growth, analysts expect a rate cut around November or December.
"We do not anticipate any changes in the policy rate in September and believe it will be maintained at 50% for some time," said Haluk Bürümcekçi, founding partner at Bürümcekçi Consulting.
Rate cut timing "will depend on developments in the main inflation trend and inflation expectations' alignment with the central bank's scenario (particularly for 2025)."
The Turkish lira slipped nearly 3% against the U.S. dollar in August to hit new lows in recent days, and last Thursday, the central bank took further steps to encourage local currency holdings by adjusting required reserves.
The domestic producer price index (PPI) was up 1.68% month-over-month in August for an annual rise of 35.75%, the data showed.
The data implies moderating cost pressures with supportive currency developments, analysts at ING said. They noted that global commodity prices that have been broadly supportive this year will likely remain the key determinant of the PPI trend ahead.
Data on Monday showed Türkiye's economy grew less than expected in the second quarter, expanding an annual 2.5% in the face of the yearlong monetary tightening campaign, but the quarterly growth rate surprised analysts by remaining positive.
The second quarter's gross domestic product (GDP) grew by 0.1% from the previous quarter on a seasonally and calendar-adjusted basis, avoiding an expected contraction.
Eyes on underlying trend
Last month, the central bank maintained its end-year inflation projection steady at 38%, with a forecast range between 34% and 42%.
Cumulative inflation in the first eight months of this year reached 31.8%, said ING analysts.
"With strengthening financial stability, economic rebalancing and improved expectations, we anticipate a decline in the underlying trend of monthly inflation in the last quarter," Şimşek said.
"Thus, we expect inflation to fall within the forecast range by the end of the year."
The central bank foresees 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.
"The downtrend will likely continue as the lagged effects of monetary tightening on credit and domestic demand and the continued real appreciation of the lira will keep the underlying inflation trend on a downward path for the remainder of this year," the ING said.