Turkish annual inflation rose to 29.77 per cent in October, the first acceleration in six months, as food and housing costs climbed and the lira weakened to 50 to the dollar.
The figures, published by the statistical agency TurkStat on 3 November, showed consumer prices up 2.58 per cent on the month and above forecasts.
The detail
Food and non-alcoholic beverage prices rose 3.5 per cent in October, and housing costs rose 3 per cent. Education inflation was 48 per cent and health inflation above 40 per cent, categories that economists describe as rigid because they are set by administrative decisions and contracts rather than by demand.
The lira touched 50 to the dollar on 3 November, having lost about 19 per cent against the US currency over the past year. A weaker currency raises the cost of imported energy, medicines and intermediate goods, which feeds through into consumer prices with a lag.
The Treasury and finance minister, Mehmet Simsek, blamed energy prices driven by the war in the region and said disinflation had become more challenging. The central bank cut its policy rate by 100 basis points to 36 per cent in late October, its first cut since January.
The policy dilemma
Turkey has spent two years returning to orthodox monetary policy after a period in which interest rates were held below inflation on political instruction. The programme has reduced inflation from more than 70 per cent, but the decline has been slower than the government hoped.
The central bank’s year-end forecast is 30 per cent, which October’s reading has now made harder to achieve. A further cut before the end of the year is less likely after this data, and economists expect inflation to end the year in the 29 to 30 per cent range.
The government wants lower rates to support growth and construction ahead of electoral tests. The central bank wants to keep policy tight enough to anchor expectations. Those objectives are in tension, and October’s number strengthens the case for caution.
What households experience
Official inflation understates the pressure felt by households that spend a large share of income on food and rent, because those categories have risen faster than the headline. Wage settlements have lagged, and the minimum wage increase due in January will be a political decision as much as an economic one.
The lira’s slide adds to the cost of imported goods and to the burden of foreign currency debt held by companies and banks. Turkish firms have large external liabilities, and a weaker currency makes servicing them more expensive.
What happens next
The central bank’s next decision is in December, and it will have November inflation data before then. A hold at 36 per cent would signal that the easing cycle is paused rather than reversed.
The longer term question is credibility. Investors have returned to Turkish assets over the past two years on the assumption that the orthodox programme would continue. A premature return to looser policy would reverse that, and the cost would show up in the exchange rate before it showed up in prices.
