- Price growth likely to stagnate at high level after steep drop
- Risks to lira after elections posing threat to price stability
According to Bloomberg article published on May 3, 2023, Türkiye’s inflation slowed below 50% for the first time in over a year, with risks for price stability rising as the country goes to the polls in less than two weeks.
Though the annual rate in April slowed slightly more than expected by economists, core inflation was still running hot, exceeding headline price gains for the first time since May 2021 in a sign cost pressures remain elevated.
Consumer inflation has almost halved since peaking in October to reach an annual 43.7% in April, down from 50.5% in March, official data showed on Wednesday. Economists polled by Bloomberg forecast it will plateau around 44%-45% for the rest of the year.
Crucial to the outlook is the outcome of the vote less than two weeks away as President Recep Tayyip Erdogan faces the stiffest challenge of his two decades in power. Under his stewardship, Türkiye has pursued an unorthodox approach and slashed interest rates in the belief it would hold back price gains.
What Bloomberg Economics Says...
“Türkiye’s headline inflation rate plunged in April in what is likely to end this cycle’s run of sizable declines. We expect price gains to follow a relatively flat course around 40% for the remainder of the year, as inflationary policies cut this deceleration process short.” Selva Bahar Baziki, economist.
Erdogan’s views contradict conventional economic theory and haven’t come close to being validated by real-world experience in Türkiye.
Core inflation — which strips out volatile items — reached an annual 45.5% last month, down from 47.4% in March. The cost of food and non-alcoholic beverages was one of the biggest contributors to the overall slowdown.
Producer prices, an early indicator of inflation, eased to 52.1% from a year earlier. Energy costs also cooled, falling nearly 4% compared with the previous month.
The extent of the deceleration may carry weight for the central bank as Governor Sahap Kavcioglu prepares to present this year’s second quarterly inflation report on Thursday, when he may revise projections for 2023 and 2024.
‘Significantly Above’
While declining sharply, food prices remained “significantly above” the central bank’s previous outlook that saw them at 22% in 2023, according to Istanbul-based economist Haluk Burumcekci.
What happens to the cost of food, which together with non-alcoholic beverages makes up a quarter of the consumer price basket, will be important in determining how much year-end inflation deviates from the forecasts, he said.
Policymakers most recently said price growth will end this year at 22.3% — more than four times higher than their official target — and then slow to 8.8% in 2024.
The lira’s performance could also determine much of what happens next, with mounting expectations for a depreciation after the May 14 elections posing a threat to consumer prices. The Turkish currency is among the worst performers in emerging markets so far this year with a drop of almost 4% against the dollar.
Lira Risks
“A lira adjustment post-election and potential adjustments in wages and administered prices will likely weigh on inflation momentum,” ING Bank economists including Muhammet Mercan said in a report ahead of the data.
Adding to strain on inflation, the government has been ramping up fiscal spending after the deadly earthquakes in February and with the approach of elections.
A unified opposition of six political parties has promised that, if elected, it would commit to inflation targeting through a set of more conventional policies and possibly wind down the regulations and backdoor interventions used to steady the lira.
Should Erdogan’s opponents win power, “Türkiye will return to inflation targeting with a new central bank,” Bilge Yilmaz, the head of economic policymaking at the opposition IYI Party, told Bloomberg Television on Wednesday.
