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Turkish Inflation Is Set to Peak Above 80% With More Angst Ahead


Turkish inflation is on track to peak above 80% soon, though the risk is that it will leave price expectations entrenched at elevated levels for years to come.

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Turkish inflation is on track to peak above 80% soon, though the risk is that it will leave price expectations entrenched at elevated levels for years to come.

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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. 

On a monthly basis, inflation in August was 2%, the smallest increase since September 2021, according to the median forecast in a Bloomberg survey of economists. 

Annual inflation likely climbed to just over 81%, up from nearly 80% a month earlier, another poll showed. Turkey’s statistics service is due to publish the data on Monday.

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What Bloomberg Economics Says…

“Underlying trends signal increasing inflation inertia as core indicators climbed in July to the highest annual rate in data available. Looking ahead, we expect inflation to increase further in September before starting to retreat and ending the year higher than the central bank’s projection.”

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

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.

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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 about 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 reaching close to 62% in July — a record high in data going back to 2004 — and forecast to rise much higher still. 

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

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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.

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