Jan 3, 2022 - World

Inflation in Turkey spikes to highest level under Erdoğan

Source: FactSet; Chart: Axios Visuals
Source: FactSet; Chart: Axios Visuals

ANKARA — Turkey’s year-on-year inflation rate jumped to 36% according to December’s consumer price index (CPI), released Monday. That's the highest rate since 2002.

The big picture: President Recep Tayyip Erdoğan has continued to push for cuts to interest rates amid soaring inflation, arguing it will strengthen Turkey's exports and the construction sector. But that unorthodox approach has seen prices fluctuate wildly and the purchasing power of working class Turks decrease significantly.

Many Turks have moved or joined their households to cope with spiking rents and utility bills, particularly in Istanbul, where around one-fifth of the population lives and where the cost of living has increased by 50% over the past year.

  • Photos of elderly Turks collecting vegetables discarded by vendors at marketplaces have become common. Street vendors have begun selling half bagels. In Ankara, philanthropists have helped to cover electricity and water bills.
  • The earnings of ordinary Turks will further erode in the new year due to fresh hikes in electricity and gas prices on New Year's Eve.
  • The government recently raised the minimum wage by 50%, but the new monthly wage is currently worth less relative to the dollar than the prior wage was at the beginning of last year, underscoring the difficulties of boosting social welfare amid high inflation and economic instability. The rise in wages may also push businesses to use unregistered workers.

Between the lines: The official statistics may not even tell the full story. While Turkey’s Central Bank projected full year inflation at 18.4% just two months ago, the independent Inflation Research Group estimates that it is 82.8%.

  • Economists have also disputed the official CPI statistics. The Turkish Statistical Institute's senior leaders have been repeatedly replaced, raising questions about the statistical body's political independence.
  • Turkey’s economic unpredictability and the discrepancies between official and unofficial figures have spooked some investors.

Driving the news: Erdoğan announced a plan on Dec. 20 to reverse the trend of Turks putting their savings in foreign currencies like the dollar by guaranteeing local currency deposits, with the state covering any losses in value.

  • That policy could strain the budget and push inflation rates higher.
  • It could also hurt the ruling Justice and Development Party (AKP), which has been sliding in the polls, in constituencies where dollar-nominated accounts are common.

The state of play: According to a new poll, some 60% of Turkish citizens do not believe the economy will recover under the current government. That includes around one-third of AKP voters.

  • Some celebrities close to the government have faced public criticism for their lavish lifestyles and alleged insensitivity to the plight of ordinary Turks.

Flashback: A decade ago, Turks could buy a dollar with around 1.8 liras. Now that figure is over 13, by far the worst decline among the emerging markets. The lira lost 44% of its value against the dollar just in the past year.

What's next: The Central Bank’s Monetary Policy Committee will meet on January 20, and its inflation report will be published on Jan. 27.

  • Goldman Sachs anticipates inflation will reach as high as 40% by mid-2022.
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