Annual inflation in Turkey has been on a downward trend since June, yet the figure for August remains more than 10 times above the central bank’s target.
According to data released by the country’s statistics agency, the annual Consumer Price Index (CPI) rate dropped to 51.97% in August, down from 61.78% in July. The monthly inflation rate also saw a decline, registering at 2.47%, compared to July’s rate of 3.23%.
The slowdown in price increases is largely attributed to a decrease in food prices, with the cost of food and non-alcoholic beverages falling by 1.10% over the month. However, this category still experienced an annual rise of 44.88%.
Housing and education have been significant contributors to both annual and monthly inflation figures, continuing to exert upward pressure on overall costs.
Policy Shift in Economic Strategy
The easing of price pressures indicates that the restrictive monetary policy implemented by Turkey’s central bank is beginning to take effect. In 2023, President Recep Tayyip Erdogan reversed his previous stance against interest rate hikes after the inflation rate hit a staggering 85.52% in late 2022.
Murat A. Yülek, a professor of economics at OSTIM Technical University, explains, “The new government has completely shifted the economic policy, initiating a rigorous tightening of monetary policy, which resulted in increased policy and credit interest rates.” Currently, Turkey’s benchmark interest rate stands at 50%, a significant rise from the 8.5% recorded in May 2023.
Yülek notes, “As a result of this tightening, domestic demand has decreased, and there has been a notable contraction in industrial sector production during the second quarter of 2024. This decline is expected to persist unless an unforeseen domestic or international shock occurs.”
Future Interest Rate Outlook
While inflation rates have been declining on an annual basis since June, they remain significantly above the central bank’s targets. In May, the CPI reached 75.45%, the highest point since late 2022, before easing in the first half of 2023.
Analysts predict a modest reduction in interest rates by December, contingent on Turkey’s inflation path. Kamil Yilmaz, an economics professor at Koç University, asserts, “Despite a notable decrease in monthly inflation compared to last August, Turkish inflation is still high. If the government maintains its commitment to tight monetary and fiscal policies until at least the end of 2026, we may see inflation levels approach single digits.”
He also cautions that the current stringent monetary policy adversely affects various segments of society and businesses, raising concerns about potential civil unrest as these groups react against the government.
The annual core inflation rate, which excludes volatile energy and food prices, fell to 51.56% in August, down from 60.23% in July.
Photo credit & article inspired by: Euronews
