Turkey’s inflationary pressures would continue due to domestic, global factors

The Consumer Price Index Turkey rose in June by 4.98%, and the annual rate approached 8%; slightly lower than market consensus (5.7%) and expectations that suggest (5.5%), which resulted in an annual figure of 78.6%. The downside surprise was due to lower food prices, particularly processed food conflicting with the recent hikes in certain administrative food prices.

Analysts expect consumer inflation to accelerate above 90% in the coming months led by loose economic policies and significantly deteriorating inflation expectations. Year-end inflation forecast has been revised to near 70%, still with risks clearly on the upside.

Domestic consumption stays strong on top of credit impulses and other loose economic policies and keeps pressure high on consumer prices without any anchor on price setting mechanism. Besides, longer than expected war conditions and post-pandemic supply side problems keep global commodity prices high.

As a result, stronger cost push factors lead companies to easily pass them to consumer prices. Also, reinforced external financing needs and high dollarization in the economy keep the pressure on the exchange rate, which could fuel the negative loop by means of both inflation expectations and production costs. Last but not least, wage adjustments remain crucial so it is obvious that inflationary pressures will likely strengthen more until a clear policy reaction is taken.

Consumer inflation is also expected to accelerate above 90% in the coming months led by loose economic policies and significantly deteriorating inflation expectations. By year-end, inflation is expected to slow down to near 70% given positive base effects in the last two months of the year, assuming no substantial shocks on the foreign exchange rate.