One of the world’s worst inflation crises closed in further on another grim milestone in Turkey, and government efforts to help the population cope with the fallout only threaten to make it worse.
Data on Monday showed annual inflation accelerated for a 13th straight month to 78.6% in June, an uptick that was slightly less than forecast by economists. Further upward pressure came from energy prices, which soared 151.3% from a year earlier, while food inflation reached almost 94%.
Price growth has been in the double digits almost without interruption since the start of 2017, but it exploded this year near a quarter-century high on the back of soaring energy and other commodity costs.
“Assuming no major FX depreciation in the rest of the year,” annual inflation may peak in October at about 88% on an annual basis and end the year at 67%, Barclays Plc economist Ercan Erguzel said in a report.
A combination of self-inflicted damage and price pressures from abroad have stirred up a storm in Turkey that the International Monetary Fund estimates will result in the world’s highest inflation this year after Venezuela, Sudan and Zimbabwe.
“We struggle to say the worst is behind because PPI continues to deteriorate,” Erguzel said. “Other indicators also suggest a worsening inflation outlook.”
The central bank, which just over two months ago predicted inflation could already start slowing as early as June, hasn’t raised policy interest rates in over a year after a round of monetary easing in late 2021, responding only with measures to cool off consumer lending.
Declines in the lira against the dollar continued in June, adding to this year’s worst performance in emerging markets that’s stoking inflation by making imported goods more expensive.
The lira slightly weakened after the inflation report and was trading down 0.5% at 16.8347 against the dollar at 3:49 p.m. Istanbul. Should the Turkish currency reach 25 per greenback by year-end, annual inflation could peak at 97% in October, according to Barclays.
What Bloomberg Economics Says…
“We expect inflation to climb even further in the third quarter amid high energy costs, a weaker currency and the central bank’s reluctance to lift interest rates to stem rising prices.”
— Selva Bahar Baziki, Turkey economist. For more, click here.
President Recep Tayyip Erdogan, who believes lower borrowing costs should help bring down inflation, has acknowledged the “burden” on people from faster price gains.
Ahead of the elections scheduled for next June, his government on Friday announced an interim increase in the minimum wage for the first time in six years, raising pay by nearly 30%. Turkey already boosted its minimum wage by a record 50.5% in January.
“The mid-year minimum wage adjustment will weigh on the medium-term inflation outlook. Macro-prudential tightening measures so far have had very limited impact on lending growth.”
Erdogan has called for patience and said last week that inflation will slow to “reasonable” levels from February-March next year.
Under the previous governor, the central bank had cautioned about a “positive shock” on inflation from increases in the nominal minimum wage. Its report last year found that headline price growth rises by one percentage point for each 10% increase in the minimum wage.
“The backward indexation in wages are likely to negatively affect the inflation outlook and expectations,” Erguzel said.