Annual inflation in Turkey soared to nearly 80% in July, with skyrocketing food, housing and energy prices hitting consumers hard, official data released by the Turkish Statistical Institute on Wednesday, July 3, 2022 showed.

The upward trend of consumer prices has already forced officials and economists to rewrite forecasts multiple times this year, as efforts to stabilize the lira falter at a time when Russia’s invasion of Ukraine is pushing the cost of everything, from food to energy up.

The Turkish Statistical Institute disclosed that annual inflation sped up to 79.6% last month from 78.6% in June, gaining slightly less than forecast by economists in a Bloomberg survey. Istanbul, Turkey’s most populous city, saw price growth exceed 99% in July from a year earlier.

This means Turkish inflation is soaring to levels unseen since the aftermath of the Asian financial crisis in 1997 as the central bank sticks with its ultra-loose monetary course.

Even in a world consumed by the fastest inflation in decades, Turkey is an outlier that ranks behind only a handful countries like Zimbabwe, Venezuela and Lebanon, where the pace of price increases has already topped triple digits.

Stabilizing the macroeconomic environment

Loosening inflation’s grip is proving harder to achieve in Turkey because the central bank has refrained from raising its key rate from 14% under pressure from President Recep Tayyip Erdogan. The Turkish leader believes – contrary to mainstream economics – that higher rates cause faster inflation.

“We see no signs of a stabilization in the macroeconomic environment for Turkey arising from the current unorthodox monetary policy settings and recommend refraining from investing in Turkish assets”.
Nenad Dinic, emerging markets equities strategist at Bank Julius Baer.

The approach put Turkish policy makers out of sync with the most aggressive global monetary tightening since the 1980s and pushed the country’s rates deeply below zero when adjusted for prices.

“Unanchored expectations and a weakening lira are feeding further into prices. We don’t expect the central bank to tighten interest rates in response to ever rising inflation, instead, the political leadership is calling for even lower rates”.
Selva Bahar Baziki, Turkey economist.

Speaking last week, central bank Governor, Sahap Kavcioglu, sounded confident that the so-called new economy model that prioritizes production, exports and employment will help stabilize prices and the lira.

Turkish authorities have instead relied on macroprudential measures like curbing commercial loan growth as well as policies aimed at widening the use of the local currency and channeling capital toward long-term investment.

The results are playing out in the currency market, with the lira down more than a quarter of its value against the dollar, this year’s biggest loss in emerging markets.

Price growth is set to peak around 85% in September-October, according to a forecast range chart accompanying the central bank’s latest inflation report. The bank’s projection now shows inflation will end the year at 60.4%, an upward revision of almost 18 percentage points that puts prices 12 times above the target.

That outlook is still upbeat relative to the views in the market. Bloomberg Economics predicts inflation will reach a high of 91% in the third quarter and only slow to 69% at the end of 2022.

Ruling out the option of tightening policy, Kavcioglu said last week that Turkey’s year-end inflation may be below the central bank’s forecast, with a slowdown possible already this month.