Turkish inflation soars 36% as lira crisis flares

Turkey’s annual inflation soared to its highest in 19 years, data showed on Monday, laying bare the depths of a currency crisis engineered by policies that the country’s president has espoused.

Consumer prices rose 36.08 per cent, outstripping a median forecast of 30.6 per cent, with staples such as transportation and food and drink - which took increasing shares of Turkish households’ incomes during 2021 - rising even faster.

In December alone, CPI took a rare step into double-digits at 13.58 per cent, the Turkish Statistical Institute data showed.

Turkey’s lira shed 44 per cent of its value last year as the central bank slashed interest rates under a drive by President Tayyip Erdogan to prioritise credit and exports over currency stability. On Monday it fell a further 4 per cent to 13.7 against the dollar.

One economist forecast that inflation could reach as high as 50 per cent by spring unless the direction of monetary policy was immediately reversed.

“Rates should be immediately and aggressively hiked because this is urgent,” said Ozlem Derici Sengul, founding partner at Spinn Consulting in Istanbul.

The central bank was however unlikely to act, she added, and annual inflation “will probably reach 40-50 per cent by March”, by when administered price rises would have been added into the mix, including a 50 per cent minimum wage hike.

Last year was the worst for the lira in nearly two decades, while the annual CPI was the highest since the 37.0 per cent reading of September of 2002, two months before Erdogan’s AK Party first took office.

Erdogan, a self-declared enemy of interest rates, overhauled the central bank’s leadership last year.

The bank has slashed the policy rate to 14 per cent from 19 per cent since September, leaving Turkey with deeply negative real yields that have spooked savers and investors.

The subsequent accelerating surge in prices and drop in the lira have also upended household and company budgets, scuttled travel plans and left many Turks scrambling to cut costs.

Many queued last month for subsidised bread in Istanbul, where the municipality says the cost of living is up 50 per cent in a year.

The central bank has argued that temporary factors had been driving prices and forecast a volatile course for inflation, which - having been around 20 per cent in recent months and mostly double-digits over the last five years - it said in October would end the year at 18.4 per cent.

Sengul suggested that, with Monday’s data, that argument had run its course.

“This reflects a vicious cycle of demand-pull inflation, which is very dangerous because the central bank had implied the price pressure was from cost-push (supply constraints), and that it couldn’t do anything about it,” she said.

Reflecting soaring import prices, December’s producer price index rose 19.08 per cent month-on-month and 79.89 per cent year on year. Annual transportation prices soared 53.66 per cent while the food and drinks basket jumped 43.8 per cent, the CPI data showed.

The economic turmoil has also hit Erdogan’s opinion polls ahead of a tough election scheduled for no later than mid-2023.

The lira touched a record low of 18.4 against the dollar in December before rebounding sharply two weeks ago after state-backed market interventions, and after Erdogan announced a scheme to protect lira deposits against currency volatility.

Inflation soared by the most in at least a decade in Turkey’s biggest city Istanbul last month, and President Tayyip Erdogan’s government sharply raised nationwide electricity and natural gas prices for the new year.

Prices also jumped for petrol, car insurance and some bridge tolls, adding more strain to an economy facing surging inflation and a currency crisis that was triggered by a series of unorthodox interest rate cuts.

The Energy Market Regulatory Authority, citing high global energy inflation, said electricity prices were raised by as much as 125 per cent for high-demand commercial users and by around 50 per cent for lower-demand households for 2022.

Natural gas prices jumped 25 per cent for residential use and 50 per cent for industrial use in January, national distributor BOTAS said. The price rise was 15 per cent for power generators.

In Istanbul, home to around a fifth of Turkey’s population of 84 million, retail prices jumped 9.65 per cent month on month in December for an annual rise of 34.18 per cent, the Istanbul Chamber of Commerce (ITO) said. Home appliance prices were up more than 20 per cent while food rose nearly 15 per cent.

Wholesale prices in the city jumped 11.96 per cent from November for an annual rise of 47.10 per cent, ITO said.

The data and adjustments will probably stoke the country’s overall annual inflation rate, which jumped above 21 per cent in November and is seen surpassing 30 per cent in December and heading higher still, largely due to a currency crash.

The lira shed 44 per cent of its value against the dollar last year after a plunge since September, when the central bank, under pressure from Erdogan, began a series of aggressive rate cuts.

Other adjustments included a 20 per cent jump in mandatory vehicle insurance costs for those with the highest deductible.