Inflation in Turkey to spike in 2022

Inflation in Turkey is accelerating and out of control due to currency collapse, global inflationary pressures and loose monetary policy. The Turkish government has promised relief, but the situation is deteriorating, affecting families across the country. Has inflation peaked or will it continue to soar?

Turkey Inflation Rate in October 2022

Annual inflation in Turkey rose to a 24-year high of 85.51% in October from 83.45% in September. Turkish Statistics Office.

The figure was the highest since June 1998 and was just below economists’ expectations of 85.6%.

Compared to the same period last year, rampant price increases were driven by transportation (117.2%), food (99.1%), housing and utilities (85.2%), and apparel (41.3%).

On a m/m basis, inflation jumped to 3.54% from the previous month’s 3.08%. Headline print also fell short of his 3.6% of market expectations.

Producer prices also experienced a dramatic surge last month. The Producer Price Index (PPI) surged from 151.5% to 157.69% y/y. Monthly his PPI also he rose from 4.78% to 7.83%.

Annual producer inflation accelerated as prices rose in four key sectors: power and gas (554.56%), mining and quarrying (162.06%), manufacturing (122.97%) and water (109.45%) . In addition, the prices of non-durable consumer goods (132.88%), intermediate goods (123.12%), durable consumer goods (98.65%) and capital goods (95.61%) also increased.

Some experts believe this could be the peak for headline inflation, but only if Turkey’s currency, the lira, does not fall further. Year-to-date, the lira has fallen about 40% against the US dollar. Over the past 12 months, the currency has plunged about 92% against the dollar.

Inflation history

Turkey has historically suffered from inflation problems, with annual inflation rates exceeding 100% on numerous occasions, especially from the late 1970s to the late 1990s. By the turn of the 20th century, however, interest rates had subsided below 10% before the coronavirus pandemic.

Turkey’s two decades of persistent inflationary problems have been driven by a number of factors, including economic distortions, constrained imports, import premiums, lukewarm output growth, and deteriorating income distribution. Moreover, the public pursuit of disinflation, which emphasized economic growth and cheap lending, backfired, resulting in a lira depreciation and price volatility.

“It’s no mystery why inflation persisted. Throughout the 1980s, monetary expansion continued and was, by all estimates, an important determinant of the rate of inflation,” economist Ann Kruger wrote in a paper. increase (pdf) was published by the National Bureau of Economic Research (NBER) in 1995.

world bank report

world bank weather Turkey’s economy is projected to slow to 2.7% in 2023 from an estimated 4.7% GDP growth this year. The agency cites inflation as a major problem facing the world’s 18th largest economy.

“Economic activity is expected to weaken in the second half of 2022 as macroeconomic volatility increases, inflation eats into the purchasing power of households unable to front-load consumption, and external demand weakens,” the World Bank said in an October report. ‘ said.

The report’s authors further point out that banks’ capital buffers have been eroded, governments have lost financial resources, and poverty rates have risen above pre-2019 levels.

“[T]Poverty rates are expected to rise from pre-2019 due to persistently high inflation, which affects the lowest-income households the most, as they spend a greater proportion of their income on items such as food that face higher-than-average inflation. It is predicted that it will exceed the level.

Why is Turkey’s inflation so high?

While the rest of the world is tightening monetary policy by raising rates, the Central Bank of the Republic of Turkey (CBRT), led by Sahap Kavcioglu, is doing the opposite by lowering its benchmark policy rate. Experts argue that this is contributing to the domestic cost of living crisis.

At the October Monetary Policy Committee (MPC) meeting, the authorities cut interest rates by 150 basis points (bps) from 12% to 10.5%. Overnight lending and borrowing rates were also reduced by 150 bps to 12% and 9% respectively.

Muhammet Mercan, chief economist at ING in Turkey, said: explained Turkey’s central bank seeks to promote a supportive financial conditions environment to ensure stable growth in multiple sectors of the economy and labor market. The central bank also aims to reverse the downward trend in external demand caused by uncertainty and risk, Mercan noted.

“Further signs of slowing economic activity and recent exchange rate stability [foreign exchange] Reserves and currency outperformance are factors in the CBRT cut this month,” he wrote. “However, continued upward pressure on the current account and subdued capital flows suggest further reductions in reserves are possible. No. Current policy settings do not favor disinflation and inflation is likely to remain high in the short term.”

Last year, financial institutions took an unconventional approach to curbing inflation by easing policy and increasing the pace and magnitude of rate cuts. From September 2021 onwards, CBRT policymakers have approved rate cuts worth 850 basis points, despite a sharp depreciation of the lira, a large current account deficit and soaring consumer prices. The central bank ostensibly takes a cue from President Recep Tayyip Erdogan, who believes the best way to fight inflation is to lower interest rates and let the economy grow.

“My biggest battle is interest. My biggest enemy is interest. Said Audience during the September event. “Is that enough? It’s not enough. This needs to be lowered further.”

Erdogan in recent times pledged “We will save investors and citizens from interest rate suppression,” he said in a speech last month.

Turkey’s economic data has been mixed in recent months. For example, the Istanbul Chamber of Commerce Manufacturing Purchasing Managers Index (PMI) he has remained in contraction territory since March, and in October he dropped to 46.4. However, industrial production rose 2.4% month-on-month in August, while retail sales rose 3.7%. October exports and imports eased to $21.3bn and $29.3bn respectively.

The concern is that with the economy stable and President Erdogan promising rate cuts, the CBRT may approve another rate cut at its November policy meeting.

“President Erdogan’s shadow on monetary policy has resulted in erratic and contradictory interest rate movements, leaving analysts uncertain about how the country will act next,” Mercan said. added.

trading economics is pencil writing Another cut of 150 basis points.

Liam Peach, senior emerging markets economist at London-based Capital Economics, said the CBRT “will continue to come under pressure from President Erdogan for looser policies.” Note.