Chart of the Week: Inflation surges in Turkey

Turkish consumer price inflation surged to 36.1% in the twelve months to December from 21.3% previously — the highest reading since 2002. Important drivers behind the increase were steep price rises in the ‘Transportation’, ‘Furnishings and household equipment’ and ‘Food and non-alcoholic beverages’ components of the index. Inflation could have further to rise over the coming months. Producer price inflation surged to almost 80% on a twelve-month basis in December, indicative of significant pipeline inflationary pressures which firms may try to pass on to households. Moreover, the jump in consumer inflation pushed real interest rates further into negative territory at -22% in December. Unfortunately, the central bank cut interest rates as recently as 16 December. Until the authorities move away from their unorthodox view that high interest rates drive inflation, they may struggle to get inflation meaningfully under control. Meanwhile, soaring prices for key consumer items such as food may further weigh on President Erdoğan’s popularity, raising the risk of a fresh round of populist policies which could impact the economy.

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