Turkish Inflation Near Record High in Erdogan Era on Lira

(Bloomberg) -- Turkey’s consumer inflation climbed to one of the highest levels since President Recep Tayyip Erdogan came to power 15 years ago, spurring calls for higher interest rates to rein in prices.

The inflation rate rose for a sixth month to 24.5 percent in September from a year earlier, above all expectations in a Bloomberg survey where the median estimate was 21.1 percent. The monthly rate was 6.3 percent, driven by an across-the-board spike provoked by the lira’s meltdown. Treasury and Finance Minister Berat Albayrak blamed hoarders and speculators, and predicted inflation would stop quickening in October.

Wednesday’s inflation report puts monetary policy makers in a bind. The central bank raised borrowing costs last month to their highest level in nearly two decades, yet prices are gaining at their fastest pace since June 2003.

Given his distaste for higher interest rates and an apparent slowdown in the economy, the bank has little room to act against further price surges. But with the lira losing as much as 40 percent of its value against the dollar since the beginning of the year, the worst may be yet to come.

“An inflation print so bad that it truly feels like old Turkey,” said Inan Demir, an economist at Nomura International in London. “But this is simply too bad to ignore. Note that annual headline inflation is now above the bank’s policy rate at 24 percent, which calls for another rate hike.”

The lira weakened as much as 1.6 percent after the data release and was trading 0.8 percent lower at 6.0330 to the dollar at 11:40 a.m. in Istanbul. The inflation rate is almost five times the central bank’s target of 5 percent and almost double its 2018 forecast.

Government Plans

Speaking after the data release in a pre-arranged interview with NTV, Albayrak attributed much of the increase to hoarding and speculative pricing by businesses taking advantage of volatility. Officials will soon be meeting representatives of various sectors of the economy for a new framework to curb prices that the government will likely announce next week, he said.

“The current trend will be broken in October,” Albayrak said.

Nigel Rendell, a London-based senior analyst at Medley Global Advisors, said the inflation figure was “a shocker” but maintained some optimism that weak consumption might offset inflationary pressures at some point.

“Interest rates of 24 percent provide some protection, and there is a sense that the weakness of domestic demand will be the dominating disinflationary force in a few months’ time once the foreign exchange pass-through has fed its way through the system,” Rendell said.

Pass-Through

What might worry policy makers is the pace at which consumer inflation is catching up with producers’ rising costs, said BlueBay Asset Management LLC strategist Tim Ash. Producer prices rose in September by more 10 percent from the previous month, bringing the annual increases to over 46 percent.

Given the slowdown in economic activity, there is little justification to raise rates at this point, but the government should end its spat with the U.S. over a detained U.S. pastor to relieve market turmoil and pressure on the central bank, Ash said.

For more on Turkey’s spat with the U.S., read: Turkey’s Bizarre Conspiracy Case Against an American Pastor

Below are some of the highlights from the report published by Turkstat on its website:

• Food prices, which make up nearly a quarter of the inflation basket, rose an annual 27.7 percent, from 19.8 percent in August
• Energy inflation accelerated to 27.03 percent from 21.3 percent
• Producer prices rose 46.15 percent from 32.13 percent
• Core inflation, a gauge that excludes volatile items such as food, energy and gold, climbed to 24.05 percent from 17.2 percent; median estimate in a Bloomberg survey called for an acceleration to 19.3 percent
• Apparel prices rose 17.16 percent from 13.6 percent and the cost of housing rose 21.84 percent from 16.3 percent
• Monthly consumer inflation rate was the worst since April 2001 and above the median estimate of 3.4 percent in a separate Bloomberg survey

--With assistance from Kerim Karakaya and Tugce Ozsoy.

To contact the reporter on this story: Onur Ant in Ankara at oant@bloomberg.net

To contact the editors responsible for this story: Benjamin Harvey at bharvey11@bloomberg.net, Amy Teibel, Mark Williams

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