Turkey’s inflation tops 80% in worst price surge since 1998

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Turkish inflation exceeded 80% for the first time since September 1998 as policies that prioritized economic growth and cheap credit weighed on the lira and price stability.

Annual inflation accelerated for a 15th consecutive month to 80.2% in August, from 79.6% in July, according to data released by Turkey’s statistics agency on Monday. The median forecast of economists surveyed by Bloomberg was 81.2%.

President Recep Tayyip Erdogan, who believes cheaper borrowing costs can slow inflation rather than push it higher, has kept exports and employment high on the agenda. This is even as Turkey’s unfolding cost-of-living crisis threatens his appeal less than a year before elections.

Turkey has the deepest negative interest rates in the world when adjusted for inflation. However, worried about “some loss of momentum” in the economy, the central bank already cut its benchmark interest rate last month by 100 basis points to 13%.

The pound traded flat after the data was released. It has fallen 27% against the dollar this year, the worst performer in emerging markets.

For much of the year, the $820 billion economy has powered despite consumer inflation rising to levels last seen during a period of political instability before Erdogan came to power. Turkey’s growth has outpaced most peers so far this year, with gross domestic product growing an annualized 7.6% in the second quarter.

What Bloomberg Economics Says…

“It is unlikely that the profits have been made yet. We expect higher inflation in the coming months amid rising energy costs and following the central bank’s rate cut. This is expected to see the year-on-year level peak in October before falling to 69% at the end of the year.”

— Selva Bahar Baziki, economist. Click here for more.

Turkish officials have so far remained noncommittal, calling the price gains temporary and blaming Russia’s invasion of Ukraine for causing a global rise in food and commodity costs.

Erdogan called for “a little patience and more support”, saying last week that inflation would start to fall at the start of the new year.

Much of the damage has been self-inflicted. Even stripping out volatile items such as food and energy, Turkish inflation is surging, with the core measure hitting 66% in August, a record high in data dating back to 2004.

Retail inflation in Turkey’s most affluent city Istanbul last month rose to nearly 100% compared with a year earlier.

The longer-term damage from the crisis, however, may be due to the way it distorts price expectations. An August survey by the central bank found that respondents expect inflation to be above 24% up to two years into the future.

The government raised its forecast for price growth to 65% in 2022 — up from 9.8% previously — and only sees it slowing to around 25% next year, according to a new three-year plan published in the Official Journal on Sunday. It is not expected to be below 10% until 2025.

Another challenge is the threat of an economic slowdown.

While major banks from Goldman Sachs Group Inc. to Morgan Stanley have revised their 2022 outlook for Turkey higher after faster-than-expected growth in the second quarter, the risk of a recession in Europe is one of the factors that could put the brakes on the economy for the rest of the year.

Consumer prices could come under pressure again if the authorities release more incentives or in the event of another energy cost shock.

“The somewhat lower-than-expected inflation in Turkey in August is welcome news for the government and the central bank,” said Per Hammarlund, head of emerging markets strategy at SEB AB. “However, with energy prices rising again in the winter months, the problem of high inflation has not been solved.”

(An earlier version of this story was corrected to say that food inflation slowed.)

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