Turkish inflation accelerated less than forecast and is on track to peak above 80% in the coming months.
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Turkish inflation accelerated less than forecast and is on track to peak above 80% in the coming months.
Annual inflation quickened for a 15th consecutive month to 80.2% in August, up from 79.6% in July, according to data released on Monday by Turkey’s statistics agency. The median forecast of 15 economists surveyed by Bloomberg was 81.2%. Price growth reached 1.5% on a monthly basis, less than anticipated in a separate poll.
“The somewhat lower-than-expected inflation in Turkey in August is welcome news for the government and the central bank,” said Per Hammarlund, chief emerging markets strategist at SEB AB. “However, with energy prices set to rise again going into the winter months, the problem of high inflation has not been solved.”
For much of the year, Turkey has been resilient to the fastest inflation in over two decades despite inaction by the central bank. Now, a few corners of the $820 billion economy are seeing pressures moderate sharply, with August rates of input cost and selling price inflation in manufacturing at the weakest in over a year.
Inflation in Turkey largely held stable in the single digits from 2004 to 2016. But policies that prioritized economic growth and cheap lending at the expense of the lira and price stability eventually touched off rounds of inflation that culminated in this year’s blowout.
The longer-term damage from the crisis, however, may be in the way it warps price expectations. An August survey by the central bank found that respondents anticipate inflation to be at over 24% as far out as two years into the future.
What Bloomberg Economics Says…
“It’s unlikely the gains are done yet. We expect higher inflation in the coming months amid rising energy costs and after the central bank cut interest rates. This should see the year-on-year level hitting a peak in October before retreating to 69% at year-end.”
— Selva Bahar Baziki, economist. Click here for more.
The government raised its forecast for price growth to 65% in 2022 — from 9.8% previously — and only sees it slowing to about 25% next year, according to a new three-year plan published in the Official Gazette on Sunday. It’s not expected to be below 10% until 2025.
Turkish officials have so far remained unfazed, calling the price gains transitory and blaming Russia’s invasion of Ukraine for causing a global spike in food and commodity costs.
Still, much of the damage has been self-inflicted.
Turkey has the world’s deepest negative interest rates when adjusted for inflation. The lira is down 27% against the dollar this year, the worst performer in emerging markets.
Even stripping out volatile items like food and energy, Turkish inflation has been surging, with the core index shooting past 66% in August, a record high in data going back to 2004.
Retail inflation in Turkey’s most affluent city Istanbul last month rose to almost 100% from a year earlier.
Economic Prospects
Another challenge is the threat of an economic slowdown ahead.
While major banks from Goldman Sachs Group Inc. to Morgan Stanley have revised higher their 2022 outlook for Turkey after faster-than-forecast growth in the second quarter, the risk of a recession in Europe is among factors that can put the brakes on the economy in the rest of the year.
Worried by “some loss of momentum,” the central bank already slashed its benchmark rate last month by 100 basis points to 13%. Economic confidence has also been declining for much of the year.
Consumer prices could come under pressure again if authorities unleash more stimulus ahead of elections less than a year from now.
For now, President Recep Tayyip Erdogan is asking for “some patience and more support,” saying last week that inflation will start to fall at the start of the new year.
(Updates with economist comments starting in third paragraph. An earlier version of this story corrected to say that food inflation slowed.)
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