Turkish inflation nudges higher as food prices surge

Turkish inflation edged up in January as higher food prices offset the effects of government price cuts and lower taxes.

Consumer price inflation accelerated to an annual 20.4 percent from 20.3 percent in December, the Turkish Statistical Institute said on Monday. Inflation was expected at 20.3 percent, according to a Reuters survey of economists.

Turkey is seeking to curb inflation from the supply side by reducing sales taxes on goods such as cars and home appliances, and cutting the price of natural gas. Similar efforts to curb food prices by issuing warnings to retailers and wholesalers appear to be failing – food price inflation accelerated to 31 percent in January from 25.1 percent the previous month.

The lira fell 0.5 percent to 5.23 per dollar at 12:22 p.m. in Istanbul, capping gains this year to 1.1 percent. The main BIST-100 index of shares fell 0.3 percent to 102,604 points.

The rise in food prices was also caused by flash floods in the province of Antalya, a centre of greenhouse production. The central bank estimates that food price inflation will slow to 13 percent this year, as it seeks to achieve a medium-term target for overall inflation of 5 percent.

Producer price inflation edged down to an annual 32.9 percent from 33.6 percent, showing that manufacturers and providers of services were less willing to pass on the pass on rising costs to consumers as the economy slows.

Turkey’s economy contracted by a quarterly 1.1 percent in the three months to September after a currency crisis, provoked by an overheating economy and a political spat with the United States, ripped into the lira, pushing up the price of imported materials and products. The lira briefly hit a record low of 7.22 per dollar in August.

The January inflation data may mean that policymakers keep Turkey’s benchmark interest rate at 24 percent at a meeting in March, just prior to nationwide local elections set for March 31.

President Recep Tayyip Erdoğan has called on producers and retailers to cut prices and criticised banks for keeping interest rates on loans high. He has also called on the central bank to reduce the cost of lending, saying that higher interest rates are inflationary.

Last month, Erdoğan announced a 10-percent reduction in natural gas and electricity prices to tackle inflation and kick-start economic growth. Energy price inflation eased to 13.1 percent in January from December’s 20.8 percent.

Consumer and business confidence however remain at low levels, indicating that inflation could remain sticky. Government tax cuts on motor vehicles, washing machines and fridges are due to end on March 31, meaning inflation could come under pressure again should the reductions be reversed.

(Updates making clear that 13 percent inflation goal is for food in the fifth paragraph.)