Turkish inflation hits two-decade high of 78.6% after president forces interest rate cuts

ISTANBUL – Inflation in Turkey in June soared to an annual rate of 78.6% – the highest in 24 years, according to official data released today – as President Recep Tayyip Erdogan’s unconventional economic policies continued to take their toll.

But unofficial estimates published by Turkish economists showed prices rising at more than double that figure.

The inflation rate reported by Turkey’s state statistics agency was the highest since January 1998.

Inflation had stood at 73.5% in May and at 15.0% at the start of last year.

Economy Minister Nureddin Nebati on Friday vowed that consumer prices will start dropping in December.

“I promise to you and to the president, we will see a drop in inflation starting in December,” he was quoted as saying by Turkish media.

According to the official data, the surge in inflation in June was driven by a jump of 123.4% in the cost of transportation and a 94-% increase in non-alcoholic drinks.

Turkey’s crisis started when Erdogan forced the central bank to go through with a series of interest rate cuts last year that he said were part of his “new economic model”.

The policy rate went down despite rising consumer prices.

But the Turkish leader rejects conventional economics and affirms that high interest rates cause prices to rise.

Economists believe his approach has exacerbated the pain felt worldwide from the jump in food and energy prices caused by Russia’s invasion of Ukraine.

Questions over data

However, more and more economists are starting to question Turkey’s official data.

A monthly report released today by Turkey’s Enag group of independent economists showed consumer prices rising by 175% in June.

Enag said prices had risen by 71.4% since the start of the year alone.

The Istanbul chamber of commerce said inflation in Turkey’s largest city has reached an annual rate of 94%.

“No one actually believes official Turkish data anymore,” said BlueBay Asset Management economist Timothy Ash.

“There is no expectation of anything like a credible policy response.”

Turkey on Friday substantially raised the minimum wage for the second time in a year to cushion the blow on households ahead of next year’s general election.

The hike of the net monthly take-home pay to 5,500 liras (RM1,443) means the nominal minimum wage has nearly doubled since the end of last year.

It stood at 2,826 liras in late December and 4,253 liras in January.

Economists warn that substantially raising the pay of a large swathe of the population is an inflationary measure that should be accompanied by interest hikes or other means of limiting spending.

Official data show that more than 40% of Turks earned the minimum wage at the start of the year. – AFP, July 4, 2022