Inflation adds pressure to Turkey’s price-control aims

• Inflation up at 32.6%
• Lira hits new low against dollar
• Goverment committed to disinflation

Turkey‘s inflation rate accelerated again in May, reinforcing doubts over Ankara’s three-year campaign to rein in soaring prices and suggesting the government’s efforts to blame recent setbacks on the Iran war mask deeper problems.

Monthly inflation in May came to 1.7 percent, taking the annualised increase in consumer prices to 32.6 percent, up from the 32.3 percent of the previous month, according to data issued by state statistics agency Turkstat on Friday.

Following the release of the higher-than-expected data, the Turkish lira dropped below 46 to the US dollar, a new record low, while the İstanbul stock exchange also fell. The blue-chip BIST 100 was trading around 13,775 points, more than half a percent off the previous close.

Ahead of the Turkstat report, finance minister Mehmet Şimşek said the government was committed to maintaining its disinflationary policies – which have combined high interest rates and a tightening of credit availability – though he warned external factors would see year-end inflation in the mid-twenties. Last month the central bank raised its year-end inflation forecast to 26 percent.

“We live in a shock-prone world and a tough neighbourhood,” Şimşek wrote on social media. “Shocks may slow the pace of the program’s delivery, but they are unlikely to change the direction of travel.”

However, while the impact of the US-Israeli conflict with Iran is taking its toll, with the disruption to energy supplies a contributing factor to the increase in transport costs, consumer-price growth has hovered around 32 percent or above for all of the past year, not just the three months of the war.

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The disinflation campaign’s focus on reducing demand has only led inflation to fall from 39 percent to 33 percent in the three years that Şimşek has been in office, economist Mustafa Sönmez told AGBI.

“This shows that narrowing demand is not sufficient and you have a supply problem, especially with food staying at 35 percent and housing costs at 45 percent, which clearly shows they cannot bring it down,” he said.

The biggest problem the government faces in its efforts to lower inflation is its inability to convince the public that price growth will slow, Sönmez said.

“They cannot make people believe that inflation will come down, which increases pricing as cautious people are trying to prepare for the storm ahead.”