Turkey’s inflation rate hits 75.5% in May, highest since November 2022

Turkey’s official inflation rate soared to 75.5 per cent in May, driven by resilient consumer spending despite hefty interest rate increases.

The Turkish Statistical Institute reported that annual consumer price inflation jumped sharply from 69.8 per cent in April, reaching its highest level since November 2022. Education, housing, and restaurant prices saw the highest inflation rates.

Finance Minister Mehmet Şimşek, however, expressed optimism that the worst of inflation was over, predicting a disinflation process to begin in June, according to Financial Times.

He attributed the expected decline to cumulative interest rate hikes of 41.5 percentage points over the past year. However, economists warn that strong consumption and loose fiscal policy may maintain inflationary pressures, making it unlikely for policymakers to lower interest rates this year.

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Turkey’s central bank has kept its benchmark interest rate on hold, expecting a “lagged effect” on inflation. The bank predicts annual consumer price inflation to slow to 38 per cent by year-end.

Despite high inflation, household consumption jumped 7.3 per cent in the first quarter, driving a 5.7 per cent expansion in Turkey’s economy.

Labour unions have expressed concerns that austerity measures are disproportionately affecting the poor, estimating a hunger threshold of TL19,000 ($590) for a family of four in May, exceeding the minimum wage. Economy officials have ruled out an interim wage hike this year.

Turkey’s inflation rate remains one of the highest globally, outpaced only by Zimbabwe, Argentina, Sudan, and Venezuela, according to IMF data. The country’s high inflation has burdened the poor and raised concerns about the effectiveness of monetary policy.

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The government’s efforts to tame inflation through higher interest rates mark a significant shift in policy.

President Recep Tayyip Erdogan had previously pushed for low interest rates to stimulate the economy. However, the appointment of former investment banker Mehmet Şimşek as finance minister has signalled a change in approach.

Economists warn that Turkey’s high inflation rate and strong consumption may persist, requiring a tight policy stance until the end of 2024. The central bank’s decision to keep interest rates on hold suggests a delicate balance between curbing inflation and supporting economic growth.

As Turkey navigates its cost of living crisis, the impact on ordinary citizens remains a pressing concern. With inflation outpacing wages and a hunger threshold exceeding the minimum wage, labour unions are calling for urgent action to address the plight of the poor.

The government’s ability to address these concerns while managing inflation and supporting economic growth will be a key test of its economic stewardship.

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