The highly anticipated July CPI inflation was reported at 9.49% according to TUIK; and 13.2% according to ENAG. Thus, the downward trend in annual inflation resulting from the base effect and the suppression of the TL is replaced by an upward trend. The 12-month CPI inflation has increased from 38.2% to 47.8% according to TURKSTAT, and from 108.6% to 122.9% according to ENAG.
The monthly jump in core C inflation was 9.61%, bringing the annual level to 56.1% from 47.3% in June.
Factors affecting inflation dynamics include the reflection of tax increases to product prices, the depreciation of TL, a weak start in monetary policy tightening, election spending promises, and high stickiness. The base effect also entered a period that will push annual inflation upwards. As can be seen from the core inflation, the direction in CPI inflation is up.
The CBRT July Survey expectation at the end of the year is 58%, but a range of 70-75% seems more realistic, and that level should be expected to continue in the first quarter of 2024.
We expect CBRT to halt monetary tightening after increasing the policy rate to 25-30%. Its efforts to tighten through loan restrictions may prove modestly effective only, meaning the depreciation of the TL and the cycle of inflation-currency-inflation will continue.
Considering that Erdogan’s pension and minimum wage adjustments will be at least 30-40% before the March 2024 local election, the CBRT’s updated 33% CPI inflation expectation by the end of 2024 does not seem easily achievable.
Türkiye’s economy slows down, households feel the “pain”…
All the economic problems that Erdogan’s government suppressed and postponed in the pre-election period due to its desire to win the election are now palpable. Being caught between a balance of payments crisis or an emergency austerity measure package, Erdoğan blessed the bitter prescription thanks to Şimşek’s council. Policies that support domestic demand in the fiscal policy are reversed, but inadequacy in monetary policy response will likely perpetuate high inflation and endless depreciation of TL.
The second half of 2023 portrays an economy in which domestic demand slows down sharply and the slowdown in foreign demand continues. The March 2024 local elections may cause a short-term pause in this process, with the support of the economy in the December-March period. After the local elections, however, it seems increasingly likely that the new economy team will continue. This suggests that the economy will hit the brakes harder after the local elections.
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