Turkey’s inflation rate goes straight to above 80%, and high inflation expectations are even more worrying
The Turkish Statistical Institute will release inflation data on Monday. Economists forecast Turkey’s inflation to rise 2% month-on-month in August, the smallest increase since September 2021. A separate survey showed that year-on-year inflation in Turkey climbed to just over 81% in August from nearly 80% a month earlier.
Economist Selva Bahar Baziki said: “The underlying trend suggests that inflation inertia is building as core inflation measures climbed to the highest year-on-year gain in available data in July. Looking ahead, we expect inflation to rise further in September , then start to fall back and end the year above the central bank’s expectations.”
From 2004 to 2016, Turkey’s inflation rate remained largely in the single digits. But under a policy of prioritizing growth and cheap loans at the expense of the lira (Turkey’s currency) and price stability, bout after bout of inflation was eventually triggered, culminating in a blowout this year.
However, the long-term damage of Turkey’s inflation crisis may be that it has distorted inflation forecasts. A survey by Turkey’s central bank found that respondents expect inflation to exceed 24 percent over the next two years.
So far, Turkey’s central bank has remained unmoved, saying inflation is only temporary and blaming the Russian-Ukrainian conflict for soaring global food and commodity prices. In fact, much of Turkey’s inflation is self-inflicted. Adjusted for inflation, Turkey’s negative interest rates are among the highest in the world; the lira has fallen about 27 percent against the dollar this year, making it the worst-performing currency among emerging markets.
Inflation has been soaring in Turkey, even excluding volatile items such as food and energy. Core inflation hit nearly 62 percent in July, the highest since 2004, and is expected to climb further. In addition, retail inflation in Istanbul, Turkey’s richest city, rose almost 100% year-on-year last month.
In addition to inflation, another challenge for Turkey is the threat of slower economic growth in the future. While big banks such as Goldman Sachs and Morgan Stanley raised their forecasts for Turkey’s economic growth in 2022 after the country grew faster than expected in the second quarter, the risk of a recession in Europe could pose a risk to the Turkish economy for the rest of the year One of the factors that “hit the brakes”.
Turkey’s central bank cut its benchmark interest rate by 100 basis points last month to 13 percent amid concerns that economic growth momentum has weakened. Also, economic confidence in Turkey has been falling for most of this year. Inflation could come under upward pressure again if Turkish authorities roll out more stimulus to boost the economy ahead of elections with less than a year left.