The fastest inflation of President Recep Tayyip Erdogan’s two decades in power is poised to ease for the first time in over a year and a half, though expectations and various measures to revive the Turkish economy ahead of elections in 2023 may keep it elevated for some time.
(Bloomberg) — The fastest inflation of President Recep Tayyip Erdogan’s two decades in power is poised to ease for the first time in over a year and a half, though expectations and various measures to revive the Turkish economy ahead of elections in 2023 may keep it elevated for some time.
The statistical effect of a high base a year earlier and two months of relative stability in the Turkish currency are starting to help contain cost increases. Data on Monday will show consumer prices rose an annual 84.9% last month, according to a Bloomberg survey of analysts, down from a 24-year high of 85.5% in October.
Retail inflation in Turkey’s most affluent city Istanbul has already ebbed slightly, slowing in November to an annual 106% from 109% a month earlier.
Turkish policies that prioritized economic growth and cheap lending at the expense of the lira and price stability have culminated in this year’s inflation shock. Officials have blamed faster price increases on high commodity costs, partly caused by Russia’s invasion of Ukraine, and other external factors.
What Bloomberg Economics Says…
“Expansionary policies ahead of next year’s elections will add fuel to the fire. To make matters worse, risks are also on the upside: the recent slow-down in the economy could prompt an even larger fiscal stimulus from political leadership, boosting demand and price gains further.”
— Selva Bahar Baziki, economist. Click here for more.
While inflation is peaking later than initially expected by authorities, Erdogan has been reiterating his unconventional view that lower rates have the power to ease prices. He has pressured the central bank to cut its benchmark into single digits, a goal it reached at a meeting in late November by bringing the key interest rate to 9%.
As a result, Turkey has one of the world’s deepest negative rates when adjusted for prices. But the president has already signaled the country will stick with the ultra-loose monetary policy approach.
“We cut the rates to single digits and this will continue as such. Don’t worry, inflation will also come down,” he said in a speech in Konya on Nov. 26.
The longer-term damage from the crisis may be in the way it warps price expectations. A November survey by the central bank found that respondents anticipate inflation to be 68% at the end of 2022 and almost 21% as far out as two years.
The central bank has a more upbeat assessment. It predicts consumer inflation will end this year at about 65% — 13 times higher than its official target.
Core inflation, which reflects underlying price pressures by stripping out volatile items like food and energy, exceeded 70% in October — a record high in data going back to 2004.
Consumer prices could come under pressure again if authorities unleash more stimulus ahead of elections months away. A much-anticipated increase in the minimum wage is expected to be announced in December.
“Although annual inflation will decelerate due to base effects — related to the lira’s drop a year ago — the underlying trends remain worrying,” said Marek Drimal, a Societe Generale strategist. “We don’t expect inflation to return anywhere near the central bank’s target on our outlook horizon.”
—With assistance from Harumi Ichikura.