Turkey’s annual inflation rate climbed to 36.1% last month, its highest level in 19 years Tayyip Erdogan’s has ruled. The currency crisis was largely caused by the president’s unorthodox interest rate-cutting policies.
According to official data from the Turkish Statistical Institute, domestic consumer prices rose by 13.58% in December, eating deeper into the earnings and savings of Turks rattled by the economic turmoil.
The year-on-year consumer price index exceeded the median forecast of surveys among economists of 30.6%. The reason is that staple items such as transport and food, which accounted for an increasing share of household budgets in 2021, rose in price even faster than the other sectors.
Some economists expect inflation to reach 50% by spring unless monetary policy is reversed. Ozlem Derici Sengul, an Istanbul-based financier, supports this view.
Ozlem stated that the rates should be raised immediately as it was an urgent issue.
She believes that the central bank will not take any action and annual inflation is likely to reach 40-50% by March. The situation will be critical in March, as prices are expected to soar and the minimum wage is expected to rise by 50%.
On Monday, Erdogan focused on trade figures, which showed that exports rose by a third last year to $225 billion.
“We have only one concern: exports, exports and exports,” he said in a speech, adding the trade data showed a six-fold rise in exports during his tenure as leader.
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% from 19% since September, leaving Turkey with deeply negative real yields that have spooked savers and investors.
The subsequent accelerating price hikes and the drop in the lira have also upended household and company budgets, scuttled travel plans, and caused many Turks to save money. Last month, for example, many people queued for subsidized bread in Istanbul, where the municipality says the cost of living has risen by 50% in a year.
“We don’t sit with our friends in a cafe and drink coffee anymore,” Mehmet, 26, a sociologist in Istanbul. “We don’t go out, just from home to work and back again,” he said, adding that he was buying smaller meal portions and believed inflation was higher than official data showed.
The central bank argues that the rise in prices was determined by temporary factors which would disappear quickly. Officially, the outlook had been driving prices and forecast a volatile course for inflation, which – having been around 20% in recent months and mostly double-digits over the last five years – it said in October would end the year at 18.4%.
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 the surge in import prices, December’s producer price index rose by 19.08% month-on-month and 79.89% year-on-year. Annual transport prices jumped by 53.66%, while the food and drinks basket surged by 43.8%, CPI data showed.
In the run-up to the elections, scheduled for mid-2023, opinion polls on Erdogan’s candidacy also reflect economic instability.
Last year was the worst for the lira in nearly two decades, while the annual consumer price index was the highest since 37.0% in September 2002, two months before Erdogan’s party first took office.
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.
Indeed, exports and the value of the currency are correlated. Thus, the Turkish crisis is the opposite of the Israeli one. Their currency has appreciated so much that exports, which normally require the conversion of purchase amounts, have fallen considerably. Hence the decision was taken to literally weaken the currency.
But in the case of Turkey, the correlation is not just about exports. In order for shipments abroad to take place, these goods must first be produced. Commodity prices rise as the cost of inputs and wages go up. Once a certain threshold is crossed, prices for goods in which Turkey is a leader, such as agricultural products, will rise so much that it will become unprofitable for other countries to buy them.
This is also due to a delayed effect. For example, wages are rising with some delay from market prices. And if this year’s harvest was sold in record time, the next one will be more difficult. As import prices, including those for seeds and farm machinery, will soar, as will wages, this will settle into the price of the new harvest. Then Erdogan’s policies will work to his favour.
On the other hand, if one considers the welfare of the population as the main goal of the state, then the Erdogan government is clearly failing to meet its target despite the increase in exports.
In total terms, the Turkish lira lost 44% of its value last year as the central bank cut interest rates under pressure from Erdogan, who focused on credit and exports without paying attention to currency and price stability. On Monday, following news on inflation, Turkey’s currency fell sharply by 5%, then rose by 3% before trading unchanged at 13.1 against the dollar.