Well, August inflation data for Turkey is out and as expected, the news isn’t great.
With the lira in free fall and the central bank hamstrung by Erdogan’s recalcitrance on rates, the annual inflation rate surged to 17.9% last month from 15.9% in July. That was worse than estimates.
And here are food prices, on a separate chart just to kind of underscore how quickly this situation is getting out of hand:
Also, it looks like PPI jumped to a truly laughable 32%, which would appear to suggest that things would be far worse for consumers if producers were actually passing all of the pressure along.
“Headline CPI is bad at 17.90% but could have been much worse”, BlueBay’s Tim Ash said on Monday, adding that “PPI was appalling though at 32.13%, suggesting retailers [are] struggling to pass on price increases due to collapsing state of domestic demand.”
And see, this is how these things spiral out of control. Obviously, demand craters in a situation as acute as this one, but falling demand means there’s no room for price increases for producers and service providers. So in order to sell their products amid soaring inflation, they eat as much of the cost pressure as they can, leading to the stark juxtaposition evidenced above between CPI and PPI. Of course that isn’t sustainable. Eventually, producers will be forced to pass that along to consumers.
Amusingly, the central bank actually came out hawkish following the release of the inflation data. “Recent developments regarding the inflation outlook indicate significant risks to price stability”, CBT said in a statement, adding that “accordingly, in line with the previous communication, monetary stance will be adjusted at the September Monetary Policy Committee Meeting in view of the latest developments”.
On one hand, it’s nice that they would come out forcefully, but on the other hand, committing to a rate hike if you’re CBT is an extremely precarious thing to do. For one thing, they’ll need to clear it with Albayrak and, ultimately, with Erdogan. If for whatever reason, Erdogan decides he doesn’t want to let them do it, well then staying on hold will be even more disconcerting for markets than it would have been had CBT not pre-committed. Additionally, there is no rate hike large enough to get a handle on this situation. Unless you think Erdogan is going to countenance a 1,000 bps hike to the policy rate, then anything they do is going to be disappointing.
Notably, they tried this back in June when they committed to hiking rates contingent on the incoming inflation data and they followed through days later, but in retrospect, their response was laughably inadequate. We mocked that episode at the time.
As a reminder, they’ve already instituted a kind of stealth hike. Last month, the central bank ceased offering one–week repo funding, which effectively forced everyone to use the overnight market. In accordance with the “simplified” framework announced in May, the overnight rate is 150bps above the policy rate – so, 19.25%. Here’s a visualization:
In any event, the central bank has backed itself into a corner now. Previously, they “had” to hike if they wanted to try to reclaim some shred of credibility in the face of the lira’s plunge, but now they really, really have to hike, because they’ve just said they’re going to.
As a reminder, CBT eschewed hiking rates on July 24, a decision that “surprised” markets, but certainly didn’t come as a shock to anyone who could read the tea leaves after Erdogan appointed Albayrak economic czar.
Speaking of Albayrak, he told Reuters on Sunday that short-term inflation gyrations are “normal”, but that policymakers in Turkey are now in a “full-fledged fight against inflation”.
The real punchline, though, came when he said this about the central bank:
The central bank in Turkey has been maybe more independent than those in other countries. It will continue this period by taking steps to continue this independence.
Write your own jokes.