In a country where all the following happened: 30% of currency devaluation in a year’s time, depleted fx reserves sold opaquely to cap the currency from weakening, a central bank with its hands tied in dealing with the inflation dynamics and locals consistently building up fx deposits with no credible economy program in sight… come November, the inflation goes out of control.
Turkey’s is especially a case study as its annual inflation is soaring in a global environment that is hardly creating any form of inflation- at all.
In figures, Turkey’s monthly consumer price inflation (CPI) reading is 2.3% for November that carries the annual level to 14.03%. The producers’ price inflation (D-PPI) is even higher at 4.08% mom thanks to the harsh currency depreciation that escalated cost side pressures and carried up the annual D-PPI to 23.11%. Back in November 2019 Turkey’s D-PPI inflation was at 4.26% and the CPI inflation was 10.56%.
The core inflation that was almost flat at around 12% over the past few months is now at 13.72%, telling that more is to come.
So basically, all the indicators foretold that inflation was to soar in the winter months and the central bank acted too late too little in that sense.
What to blame, what to do?
The toxic choices that have resulted with today’s 14% inflation can be summarized as:
- Strong political intervention to pull down both the nominal and the real interest rates in Turkey.The President has a blind faith in his own made theory that “high interest rates create high inflation”. Hence, he forces his economy management team to act accordingly is the biggest part in the current high inflation in Turkey. Premature rate cuts, aggressive easing cycles and delayed rate hikes are how the intervention manifests on policy making. His appointed son-in-law as the Treasury and Finance Minister whom acted to please the President and only the President has further fueled the imbalances in the Turkish economy.
- The central bank’s failed efforts to sell fx reserves through the public banks in order to slow/control TL depreciation. The central bank of Turkey and the banking sector watchdog acting in various ways to stop foreign investors from speculating on TL also worsened the situation, adding to TL depreciation.
- The government’s coordinated action to spur domestic demand as a reaction to COVID-19 related economic contraction: credit boom based on cheap lending, the “active ratio” introduced to force banks to lend excessively that resulted in heavier dollarization.
- Top economy management team’s denial of economic realities and their related medium term programs not tailored to address Turkey’s pressing macroeconomic structural problems: such as the need for external borrowing for growth, tendency of creating higher current account deficits in growth periods and accompanying rise in inflation especially when it coincides with TL devaluation.
There is little to choose from after this point. Further rate hikes are needed in the very short-term.
The central bank with its new Governor Agbal has acted at its most recent MPC meeting in two ways: it simplified the monetary policy by sticking only to the “policy rate” for its funding and it carried the policy rate to 15% from 10.25%.
Now with D-PPI at 23%, both the core inflation and the CPI inflation at 14%; the bank needs to act decisively on its next MPC meeting scheduled for December 24. The early indicators show how the Turkish economy is still thriving as of the end of November. The slowdown will begin in December to get more tangible in 1Q21 along with the partial curfew measures, weak TL and higher rates. Yet, before that Turkey’s CPI inflation could reach new highs, pass trough will set sail, dollarization will gain momentum at a time when the still widening current account deficit is pressuring the Turkish lira.
A credible revision to Turkey’s medium term program (YEP), fair amount of “reforms” to address the pressing social and economic problems of the country, far less political intervention to the routine functioning of autonomous institutions and improved foreign relations are the keys to reverse the trend for the better.
A profound change of perception in the way Turkey is being governed to lower Turkey’s very high inflation is urgently required. It can come either through a change of skin from President Erdogan or the result of early/timely elections. Before that, permanently lowering Turkey’s inflation is an impossible task as high inflation is the result of numerous policy mistakes done especially over the past few years.
The details of the November inflation are below:
Producers’ prices relentlessly adding to cost side pressures
D-PPI in four main sectors of industry increased by 2.15% monthly for mining and stone quarrying (19.63% yoy), increased by 4.33% mom for manufacturing (25.04% yoy), increased by 1.69% mom for electricity, gas, steam and air conditioning (0.58% yoy), increased by 0.49% mom for water supply (12.83% yoy).
The indices of main industrial groups; increased by 4.77% for intermediate goods (30.07% yoy), increased by 2.74% for durable consumer goods (25.84% yoy), increased by 4.17% for non-durable consumer goods (18.90% yoy), increased by 2.79% for energy (0.36% yoy), increased by 2.58% for capital goods (27.85% yoy).
Hence, the currency weakness is totally reflected on the D-PPI side which combined with strong domestic demand spurred by the government ended up in 14% annual CPI inflatipon; with more in the pipeline.
Strong domestic demand lifts up the CPI
The breakdown of the 2.3% mom (14.03% annual) CPI inflation tells the real story behind Turkey’s disappointing inflation numbers.
Turkey’s non-existing agricultural policy and the government’s lean on importing agricultural products at an increasing extent have resulted in a monthly food price inflation of 4.16% and 21.08% on the annual level. Transportation prices up 4.51% mom (18.67% annual) can be called a victim of the COVID-19 social distancing culture that have forced the firms to escalate their services to keep afloat.
Miscellaneous goods and services with 4.51% mom spike (29.42% annual) is another outlier reflecting what demand and cost side pressures combine to create.
Housing prices +1.05%, restaurant prices +1.13%, clothing and footwear +1.14%, recreation and culture +1.53%, household furnishing +1.69% all on monthly terms tell how the inflation has spiraled out of control in Turkey.