Turkey’s inflation spirals out of control(Al Monitor, July8, 2021)

Turkey’s annual consumer inflation threatens to soar to more than 20% as official data showed a two-year high of 17.5% in June amid growing popular frustration with President Recep Tayyip Erdogan’s government.

While Ankara’s consumer inflation target stands at 5% this year, the rate is likely to rise to 19% in July under the impact of a combination of factors, including recent price hikes on electricity and natural gas, which alone could add one percentage point to the rate. The heightened energy cost of producers will inevitably push prices up.

Moreover, consumer inflation was already under the heavy pressure of producer inflation, which rose another four points in June to hit 42.9% over a year. Producer prices have been fueled mainly by the ongoing slump of the Turkish lira, which is aggravating costs in Turkey’s import-dependent economy. The big gap between consumer and producer inflations is a harbinger of further increases in consumer prices down the road that are likely to bring the rate to 20% in several months.

With an inflation of 20%, the central bank’s benchmark interest rate of 19% would become irrelevant. The government has been eager for a rate cut, but the unyielding inflation stands in the way. Normally, the central bank would have to consider a rate hike to rein in inflation, but given Erdogan’s stern opposition to high interest rates, such a prospect remains uncertain. In short, Ankara’s economic management is vacillating without any efficient remedy at hand.