May inflation:  Conflicting signals

[…] general softness in most categories of goods, but stubborn stickiness in services.  Yet, the data leaves a lot to be desired in terms of pointing the way for a permanent disinflationary trend and some of it is outright against known  patterns. The unexpectedly sharp in food prices was a key driver of lower CPI inflation this month (at least as far as market forecasts are concerned), […] which spanned March 24 through the first half of May should have passed through to core rapidly, why did it fall? The best  explanation comes the report of Yatirim Finansman Securities: ‘With regard to lower than expected core goods and services prices, we believe factors such as i) the propensity of the retailers to cut down seemingly high excess inventories, […] decline in consumer demand were the key drivers. TL stability would still remain the key factor for how core inflation would behave in 3Q19 and onwards. Another issue to remember is that producer prices remain elevated at 28.7% YoY due to higher input prices (FX-pass thru and global commodity prices) pushing up monthly PPI to 2.7%. In other words, cost-push inflationary pressures continue to build-up.  Therefore, we cannot ignore potential FX-pass thru effects on core goods in coming months’. Houseware prices ped 1.58% on the month, even though the category is highly sensitive to exchange rate depreciation. Once again, inventory dumping and very weak demand could be at play here. Price stickiness continues in services, erecting a major barrier to further disinflation:  some service-concentrated sub-categories (e.g., hospitality, culture, education), were broadly unchanged. As a matter of fact, service inflation, which was unchanged at 15.1%,YoY, remained sticky through May, wrote PA Intelligence a private economist in an e-mailed reply, who  referred not have his name and title disclosed. The future path of inflation is highly uncertain.  Economists don’t predict a significant demand recovery, an observation confirmed by the  18% decline in imports in May YoY, according to Trade Minister Mrs. Ruhsar Pekcan. Lower petroleum prices, too, if they were to last, would accelerate disinflation, but the good news ends there. Given massive budget deficits which reached an estimated 2.7% of GDP as of April, revenue raising measures are widely anticipated post-Istanbul elections, boosting the headline CPI. The outlook for TL is highly uncertain.  A deal on S-400s could trigger a rally, while the capital flight in progress EMs or  new diplomatic entanglements with US, EU or even in Syria could rapidly weaken the currency once again.  Finally, the outlook for agricultural prices is difficult to predict. We have anecdotal data of farmers reducing acreage under plantation because of high costs, but have so far no official crop forecast. The few year-end forecasts we […]