Inflation in Turkey dropped to 39.6% due to free gas

investing: Turkish annual inflation fell to 39.59% in May, official data showed on Monday, broadly in line with expectations, largely due to the government offsetting price rises in other goods by providing natural gas free of charge.

The Turkish Statistical Institute (TUIK) said last week that it would apply a "zero price" method for natural gas in the consumer price index (CPI) calculations for May, a month in which President Tayyip Erdogan won re-election.

The government had pledged ahead of last month's elections that it would provide free gas in May, and a monthly free 25 cubic metres until May 2024. The move is seen costing the government 40 billion lira ($1.89 billion).

May consumer prices rose 0.04% from a month earlier, compared with a forecast of a 0.2% fall in a Reuters poll.

The poll had forecast that annual consumer price inflation (CPI) would be 39.2%, and was expected to end the year at 45%.

The domestic producer price index was up 0.65% month-on-month in May for an annual rise of 40.76%, according to the TUIK data.

Clothing and shoe prices recorded the largest monthly increase with 9.85%, followed by restaurant and hotel prices with 7.10%.

Housing prices, which include natural gas, dropped 13.79% on a monthly basis, and were the only group to record a decline last month, lowering the overall monthly reading by 2.09 percentage points.

The weight of natural gas in the inflation basket is 2.9%.

Core "C" inflation, which excludes energy, food, beverages and tobacco prices, rose 4.25% month-on-month, for an annual rise of 46.62%, up from 45.48% in April.

POLICY TIGHTENING?

Inflation was stoked by a late-2021 currency crisis and it touched a 24-year peak of 85.51% in October. It eased to 43.68% by April with a favourable base effect and relatively stable lira.

Erdogan has urged monetary stimulus over the last several years, aiming to achieve price stability by slashing borrowing costs, boosting exports and flipping chronic current account deficits to surpluses.

But Erdogan, who was elected for his third term, appointed Mehmet Simsek, who is highly regarded by financial markets, as Treasury and Finance Minister. The move was seen as setting the stage for a return to more orthodox policies, including rate hikes in coming months.

"Bringing inflation down sustainably will require a major policy tightening and the appointment of a more credible cabinet over the weekend provides hope that policymaking may shift in a more sustainable direction," said Liam Peach, senior emerging markets economist at Capital Economics.

Analysts have also pointed out that in past episodes in which Erdogan pivoted to orthodoxy, he quickly and suddenly returned to his rate-cutting ways.

"The central bank will need greater independence to raise interest rates but it's unclear whether this will happen and, even if it does, how long any policy shift would last," Peach said in a note.

Newly appointed Vice President Cevdet Yilmaz said on Monday that the government would prioritise the fight against inflation, adding that they were "aware it will take time."

($1 = 21.1318 liras)