Turkish inflation nears 80% as Erdoğan’s monetary policy takes its toll

Turkish inflation has reached nearly 80%, with analysts warning that the country risks being trapped in a spiral of rising prices and wages.

Consumer prices rose 78.6% year-on-year in June as President Recep Tayyip Erdoğan’s unconventional monetary policy and the war that disrupted Ukraine’s food and energy imports took their toll. This was the largest annual increase since 1998, although the rate was slightly lower than analysts’ consensus forecast of 80%.

Erdoğan, who rejects the widely accepted view among economists that raising interest rates curbs inflation, ordered the central bank to keep its benchmark borrowing rate well below the level of the inflation.

As a result, the lira has lost 48% of its value against the dollar over the past 12 months. The falling currency has been a major driver of rising prices in a country that depends on imports, especially energy. The effects were compounded by a spike in energy and other commodity prices following Russian President Vladimir Putin’s invasion of Ukraine.

Monday’s latest inflation data, up from 73.5% in May, comes after Turkish authorities last week announced a 30% increase in the minimum wage – just six months after raising the base wage rate by 50%.

Opposition parties and trade unions, which accuse the government of manipulating inflation figures, said the increase was badly needed to stave off poverty for millions of households struggling with soaring food prices.

Erdoğan, whose ruling party has seen support fall to historic lows in part due to economic turmoil, also backed the hike while insisting that inflation would reach “reasonable levels” early in the year. ‘next year.

But economists have warned that the rise in the minimum wage rate, which affects around 40% of the official workforce and has a ripple effect on other sectors, would itself contribute to a continuation of a high inflation in the coming months.

Goldman Sachs recently raised its year-end inflation forecast from 65% to 75%, warning that the latest minimum wage hike risks leading to “a price-wage spiral”. This increase, combined with other factors, including the likelihood of further depreciation of the Turkish lira, means that “underlying inflationary pressures in Turkey remain very high”, he said.

Leave a Comment