Turkey inflation soars to over one-year high at 64.8%
Peple walk next to an exchange currency shop in Istanbul, Turkey, Thursday, Dec. 21, 2023. Turkey’s central bank hiked its key interest rate by 2.5 percentage points on Thursd
By Indrabati Lahiri
Published on 03/01/2024 – 13:25
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Turkey’s inflation jumped to its highest level since November 2022, driven by higher housing and utilities prices
Turkey’s year-on-year inflation report for December 2023 came out today (3 January), clocking in at 64.8%, the highest since November 2022 and a step up from the last month’s 62%. However, this was below analyst estimates of 65.1%. Core inflation also hit 70.6%, the highest since 2004, up from 69.9% in the previous month.
This was mainly due to increases in transportation prices, which rose 77% in December, up from 70% in November, as well as housing and utilities prices, which rose to 40.4% from 37.55% the previous month. Furthermore, restaurant, hotels and cafe prices also inched up slightly to 93.2% from 92.9% in November, whereas culture and recreation prices jumped to 61.3% up from 56.9%.
Food prices touched 3-month highs at 72%, from November’s 67.2%. Month-on-month inflation however, eased to 2.9% down from 3.3% in November.
Turkey has recently announced that it will be hiking its net minimum wage by about 49% to around 17,000 lira (€523) before its March municipal elections. If so, this could potentially fuel another hike inflation hike, whilst many households are already struggling to pay for rent and basic necessities. This in turn, has led to a surge in debt and mental illness.
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Why is inflation so high in Turkey?
The Turkish economy, which is currently considered to be overheating, saw a rapid surge in inflation last year, after the central bank aggressively cut interest rates following president Recep Tayyip Erdogan’s second presidential victory in the country where he has held sway since 2003, but previously as prime minister. At the time, the central bank focused more on export competitiveness and growth, rather than bringing inflation back under control.
Erdogan has opined publicly about higher interest rates causing inflation, thus justifying the intense monetary policy loosening. This, in turn, led to a plunge in the lira, especially impacting workers sending funds overseas.
This led to the central bank sharply reversing its stance and pulling up interest rates, following months of eye-watering inflation, as the new governor Hafize Gaye Erkan took office in June 2023. Since then, interest rates have shot up to 42.5% from 8.5%.
However, this may still be seen as too little, too late, as core inflation in December still touched two-decade highs. With the lira still falling, input and production costs for businesses have also climbed up, leading to more costs being passed on to final consumers, as well as lower wages and more unemployment.
This has also given rise to a rapid “brain drain”, with several semi-skilled and skilled workers looking for better opportunities elsewhere in Europe, potentially devastating for Turkey’s economic future.
The country’s current account deficit – due to imports exceeding exports – has also contributed to the economic situation, further eroding confidence in the government amid the inflation crisis.
