Turkish consumer inflation soars to 73.5%


Turkey’s consumer inflation hit a 24-year high of 73.5% and the Turkish lira has lost 65% of its value since September as President Recep Tayyip Erdogan pursued a controversial policy of lowering inflation. interest rates and promote growth at the expense of inflation spiraling out of control.

Consumer price increased by 2.98% in May to bring annual inflation down to 73.5%, the highest since 1998according to data released Friday by the Turkish Statistical Institute (TUIK).

The monthly rate was lower than economists’ projections, reigniting a debate over the reliability of official data. Median estimates from polls conducted by Reuters and the state Anatolia News Agency stood at 4.8% and 5.49% respectively. Many observers have also noted that TUIK, whose leader was controversially dismissed earlier this year, stopped publishing detailed price charts this month.

“Why is it exactly now that you thought of discontinuing the data that has been published since 2003?” asked a seasoned economics commentator Alaattin Aktas, calling monthly inflation of 2.98% a “miraculous” drop from over 7% in April. Some also questioned the widening gap between consumer and producer inflation, which reached almost 60 percentage points. Producer price rose nearly 9% in May, with the annual increase exceeding 132%.

Anyway, the announcement of natural gas and electricity hikes up to 40% at the beginning of the week is a harbinger of a further acceleration in inflation at all levels. Annual inflation reaching 100% in the coming months would not be a surprise.

In May, the largest monthly increase, 6.5%, occurred in the alcoholic beverages and tobacco group. Food prices, one of the main drivers of the inflationary storm in Turkey, rose at the relatively modest rate of 1.6% in May, according to TUIK, with annual food inflation reaching 91.6%. In the transport group, which is assigned the second largest weight in the inflation basket after food, prices rose 3.4% in May, bringing the annual rate to almost 108%. Prices in the hotels, cafes and restaurants group rose nearly 5.5% in May, with the annual rate climbing to 76.8%. Prices for housing, clothing and household equipment also continued to rise in May.

A self-proclaimed “enemy of interest rates“, Erdogan hoped that their reduction will help achieve robust economic growth and strengthen his weakened popular support before the presidential and legislative elections scheduled for June 2023. Following the slowdown caused by the COVID-19 pandemic in 2020, the economy Turkey increased by 11% in 2021 and 7.3% in the first quarter of 2022, but not without the side effects of galloping inflation.

At Erdogan’s request, the Central Bank lowered its key rate by 500 basis points over four months, bringing it to 14% in December from 19% in September. Consumer inflation stood at 19.6% in September, while one dollar was worth 5.6 liras.

Inflation has jumped nearly 54 percentage points since then, driven mainly by a wave of dollarization fueled by rate cuts and the resulting negative lira yields. The currency has lost 65% of its value since September, plunging to some 16.5 against the dollar in early June despite a government-backed program to stop the flight of the pound through exchange-protected lira deposits in which the Treasury compensates for losses resulting from the depreciation of the currency.

The Central Bank, on the other hand, has all but lost its relevance as the agency responsible for maintaining price stability. Heeding Erdogan’s opposition to higher interest rates, he has ditched his main inflation-fighting tool even as the fallout from war in Ukraine exacerbates Turkey’s economic woes.

The bank’s monetary policy committee kept the key rate unchanged at 14% at its May 26 meeting. His reasoning raised many eyebrows among economic pundits.

The committee attributed the price increases largely to external headwinds and storage. Arguing that “strengthened measures” were in place to stabilize prices and initiate a process of disinflation, he also pinned his hopes on a potential reduction in base effects and on the “restoration of the climate of global peace”.

In reality, however, Erdogan is opposed to disinflationary measures, which would mean economic cooling, contraction, cuts in industrial capacity and a deeper unemployment problem ahead of the election. Instead, he is betting on risky policy to support growth in a highly inflationary environment. High negative rates helped keep demand alive, but inflation rose to formidable proportions. The purchasing power of the masses is rapidly melting and even the wage hikes expected in July could prove futile.

Protecting savings against inflation has become a daunting task. Currency protected deposits reached nearly 875 billion lira ($52.9 billion) last month, but still only accounted for 13% of all deposits. Despite the guarantees, the rate of return under the scheme remains below the rate of inflation. Hard currency deposits, meanwhile, account for 57% of all deposits. Many well-to-do have rushed to buy property to protect their money’s worth, contributing to skyrocketing prices in the housing market.

Home prices in Turkey rose 110% year on year in March, according to Central Bank data, a real increase of nearly 30% in inflation-adjusted terms. In Istanbul, Turkey’s most populous city, the surge in house prices was even stronger, reaching 122% year on year in March. Rent prices have also soared, prompting warnings of a housing crisis and other social repercussions.

A growing number of observers say that Erdogan could hardly maintain his growth policy in the context of high inflation until the June 2023 elections. He could be forced to call a snap election in the fall to avoid a greater popular reaction next year.

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