Annual inflation in Turkey increased to 70% in April from 61.1% in March, and remained at the highest level in two decades. We observe the effects of the rise in global energy prices and local food costs in the periodical inflation, which was realized as 7.25% on a monthly basis, above our 5.2% expectation and the market's general expectation of 5.75%.

If we look at the sub-items of inflation; An increase is observed in all main expenditure groups. Producer prices increased by approximately 7.67% during the month, bringing annual producer inflation to 121.8%. Factory price increases are fueling consumer prices as triple-digit annual PPI is recorded uninterruptedly for the third month in a row. The fact that the PPI is very high even in a period when the exchange rates are quite calm indicates that raw material and energy prices are reflected very quickly.

The upward trend in consumer inflation continues undisturbed. The global rally in energy commodities continued to drive up utilities and refined product costs, while energy inflation rose to 118.2% from 102.9% in March. Food prices, which make up roughly a quarter of the consumer basket, rose to 89.1% year-on-year from 70.3% in the same period. The core inflation index, which excludes the impact of volatile items such as food, energy and gold, rose from 48.4% to 52.4%. The seasonal impact of food also seems to have been high. The main increase trend in food prices in the world and in Turkey has caused a very high increase in food compared to the previous month, with the effect of increasing demand along with the effect of Ramadan and Eid. In annual figures, transportation has reached the rate of 105.9%. Food and non-alcoholic beverages stand out with 13.38%, housing 7.43%, clothing and shoes 6.96%, and restaurants and hotels 6.95%, as items that showed a higher increase than headline inflation.

The total weight of items such as food (89.1%), transportation (105.9%) and housing (61.1%) that shape the main spending preferences of households in Turkey has a weight of 56.2% in the consumer basket. Cumulatively, price increases in these items increase the impact of inflation on the lower income strata in an environment where headline inflation is 70%. Istanbul retail price inflation, which was announced before the feast, also rose from 63.3% in March to 80% last month. An increase of 8.9 points in the annual inflation rate from 61.1% to 70% indicates that the periodic inflation pressure is still very high and well above the rates of the previous year. This situation does not have a positive effect in terms of the general path of inflation.

The fact that the PPI continues to rise in this environment reveals that we continue to be under serious cost pressure and that the CPI will continue to rise in May. This means that the inflation path may form above 70% for a few months. Depending on possible price developments, multi-channel inflation factors indicate that the risks regarding the current path are also on the upside.

The central bank will hold its next rate-setting meeting on May 26. With the recent rise in inflation, Turkey's inflation-adjusted benchmark interest rate has reached negative 56%, which is by far the lowest real return among emerging markets. The central bank also kept rates unchanged for the fourth consecutive meeting in April, after cutting policy rates by 500 basis points in late 2021. The effect of the interest rate cuts caused the lira to erode over negative TRY interest rates, accelerating the increase in consumer prices. Although the lira seems to have stabilized for a while with products such as FX-linked product, which was introduced later, it has lost around 10% of its value against the dollar in general this year.

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