Turkish consumer prices rose 3.08% in September as annual inflation hit 83.45%, the country’s statistical institute announced Oct. 3, days after the central bank stunned markets with a second rate cut in two months that brought its policy rate to 12%.

The unprecedented 71.5-percentage-point gap between inflation and the bank’s policy rate is the result of President Recep Tayyip Erdogan’s belief that reducing interest rates helps curb inflation, which is the opposite of what mainstream economic theory says. Going against a global monetary tightening cycle to tame prices, Turkey’s central bank has been cutting rates at Erdogan’s behest since last year, fueling the fall of the Turkish lira. Nevertheless, Erdogan could still come up with ways to argue that his policy is bearing fruit as he seeks to patch up his dropping popular support ahead of elections due in June 2023 at the latest.

Inflation in September was driven by electricity and gas hikes of 20% and 21%, respectively, as well as price increases of up to 2% on food and up to 7% in the education group. Housing costs alone rose nearly 10% on a monthly basis.Producer prices, meanwhile, soared 4.78% in September from the previous month, bringing the annual increase to 151.5%. The 12-month average of producer inflation constitutes the basis for hikes on public sector goods and services as well as taxes, fees and fines. That average is likely to top 100% at the turn of the year, meaning that hefty hikes are already looming from the public sector alone.



Written by Mustafa Sönmez