Turkish inflation to keep soaring, testing patience with Erdogan’s U-turn
Individuals stroll by a store promoting discounts in Istanbul, on January 19. [Reuters]
Turkish citizens will not experience much relief from the increasing cost of living this summer, as economists predict that prices will rise by up to 8.5% in August. This highlights the challenges faced by Ankara as they embark on a difficult journey towards more traditional policies. The continuous inflationary pressure, caused by a devaluation of the lira and increased taxes, coincides with President Tayyip Erdogan's new finance minister and central bank chief implementing a policy shift that includes raising interest rates, which is expected to slow down domestic demand. The intention behind this monetary tightening, after years of aggressive rate cuts, is to control inflation by the middle of 2024. However, in the meantime, this policy reversal has negatively affected the currency and has led authorities to request patience from already stretched households.
During the month of July, the prices that consumers pay for goods and services increased by almost 10% in consecutive order. This was mainly a result of tax increases and a swift decline in the value of the local currency, the lira. As for this month, five economists have predicted that consumer prices will continue to rise, estimating a range between 5.5% and 8.5%. It is expected that the impact of the tax hikes implemented in mid-July will continue to affect prices throughout August.
According to the economists speaking to Reuters, there is an anticipated increase in food prices for this month. This surge is a result of the fuel tax increase that took place on July 16. The purpose of this tax hike was to contribute to the funding of a substantial budget increase, amounting to 1.12 trillion lira ($42.2 billion). This rise in the budget was deemed necessary due to the expenses incurred from the earthquakes in February and the elevated spending resulting from the May elections.
The increase in taxes caused a significant surge in the cost of petrol, skyrocketing it by 45% to a rate of 36 lira for every liter. Furthermore, in Istanbul, Turkey's biggest metropolis, there were also independent increments in the fares for public transportation and taxis. Specifically, taxi fares for short distances experienced a staggering spike of 75%, while overall public transportation fares were raised by 51%.
Erdogan's earlier attempt to decrease interest rates led to a significant rise in the annual inflation rate, reaching over 85%, the highest in 25 years. This also resulted in the heavy government intervention in managing the lira.
However, following his re-election in May, Erdogan, confronted with an uncertain economy and diminished resources, appointed a fresh cabinet in an effort to reverse course. Under the leadership of new Governor Hafize Gaye Erkan, the central bank has subsequently raised rates by 900 basis points, resulting in a significant 26% decline in the value of the lira, which now experiences a more flexible exchange rate.
Even though Erdogan has openly disagreed with high rates in the previous instances, Erkan has made a firm commitment to carry on with her step-by-step increase.
However, partly as a result of the devaluation of the currency, the central bank predicts that inflation will increase each year until the second quarter of 2024. During this time, it is anticipated to reach over 60%, leading to further difficulties in maintaining the cost of living for Turkish people.
In an open declaration, Erdogan openly supports the objective of reducing inflation to single digits. However, he stated on Monday that the government will not make any concessions when it comes to employment and economic growth. A few experts have raised doubts about how much he will let rates increase and growth decline, particularly considering the upcoming local elections in March. In response to this, Finance Minister Mehmet Simsek emphasized that he has Erdogan's complete backing.
According to a knowledgeable Turkish representative, the slow implementation of stricter measures is intended to safeguard the country's economic growth and prevent any adverse effects on employment and the overall economy.
Moody's mentioned that Turkey's credit ratings may be improved if the commitment to conformity is maintained. However, since this will reduce the pace of economic expansion, they highlighted the importance of finding a harmonious equilibrium between the necessity for proactive measures and the political demand for strong and consistent economic growth.
Economists claim that ever since Simsek and Erkan assumed control two months back, the Turkish Statistical Institute (TUIK) has been releasing data with price measurements of superior quality.
According to an anonymous economist, the inflation rate in July, which stood at 9.5% per month, completely captured the impact of tax and fuel adjustments. This marked a noticeable contrast between the inflation readings in June and July compared to those at the beginning of the year.
Since 2018, certain economists and politicians who oppose the government have expressed their dissatisfaction with the data provided by TUIK, arguing that it did not align with the actual prices observed in the market. Despite facing criticism for several years, the central bank finally adjusted its inflation forecast last month to 58.0% for the year 2023, up from the previous forecast of 22.3%. [Reuters]
