Globally, inflation has been soaring due to the swift demand recovery after the COVID-19 pandemic, supply-chain issues, and the Russia-Ukraine war. Inflation isn't showing any signs of abating and even worse, the efforts focused on controlling it are threatening to plunge the economies into recession. However, the situation isn’t the same everywhere as far as inflation rates are concerned and some countries have been impacted more than others. Turkey is one of the worst impacted by inflation with rates approaching 80 percent YoY. Why is Turkey’s inflation so high?
Turkey’s inflation is the highest in 24 years.
Globally, inflation may be the highest in Turkey. As per its latest data, the annual inflation in the country surged to 78.6 percent in June, the highest since 1998. However, opposition parties and many economists suggest it could be understated with actual inflation in the country running at almost double that figure. The major culprits for the high price level are the rising costs of transportation. For June, the annual price rise in the transportation sector was 123.4 percent while the cost of food and non-alcoholic drinks rose by 93.9 percent.
Turkey’s inflation woes are self-inflicted.
In addition to what has been ailing the other world economies, some of Turkey’s issues are self-inflicted. The economic policies followed by the country can’t be exactly termed as prudent in these times. President Recep Tayyip Erdogan believes that interest rate cuts help to lower inflation, while the rest of the world believes it's the other way around. Its central bank doesn’t have any independence and the president has fired central bank chiefs who expressed a different opinion.
The Turkish lira is depreciating quickly.
The country’s currency, the Turkish lira has been losing value since the pandemic began. The lira lost more than 40 percent of its value in 2021. Turkey's central bank cut its policy rate by 500 basis points from 19 percent to 14 percent. This year alone, the currency has plunged by more than 20 percent, which has also taken a toll on the spending power of average citizens.
Rising energy prices, thanks to the Russia-Ukraine war, have put unprecedented pressure on the country’s reserves. Due to the depreciating lira, these have to be paid in even more Turkish lira, which compounds the problem further.
Inflation in Turkey might get worse in the coming months.
What is even more disappointing for consumers in Turkey is that there doesn't appear to be an end in sight. In fact, economists expect the inflation trajectory to only get worse in the country in the next few months. The producer price index continues to deteriorate. Energy prices aren't expected to come down anytime soon. The central bank’s policy remains counter to what's needed to control inflation and strengthen the currency. All of these indicators suggest a worsening inflation outlook for the Turkish economy.
Assuming no major currency depreciation in the rest of the year, Barclays expects Tukey’s inflation to peak in October at 88 percent.