Inflation jumps to 17.9% as Turkey battles with lira crisis

Turkey's consumer inflation accelerated more than expected last month as a tanking currency boosted prices.

The annual inflation rate rose to 17.9 per cent in August from 15.9 per cent the previous month, exceeding the median estimate of 17.6 per cent. Turkey’s state statistics office said the monthly inflation was 2.3 percent, compared with 1.84 percent in a separate survey. The lira was little changed after the report.

The lira has fallen 42 per cent against the dollar this year, hit by concerns about President Recep Tayyip Erdogan’s grip on monetary policy and a worsening rift with the United States over a detained American Christian pastor.

The sell-off has raised fears about the impact on the country’s wider economy and banks. Economists are particularly worried about the central bank’s inability to rein in inflation. The currency was trading 1.7 per cent lower at 6.6505 per US dollar at 10am in Istanbul.

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Monday’s report shows the currency’s dive is taking a toll on consumers who are reeling from the highest inflation in 15 years. The Turkish central bank, which held its rates at its last meeting in June, is raising the cost of lending through fringe tools ahead of next week’s meeting.

Energy index

Within the inflation report, the energy index, which tracks the price of power and refined oil products, rose 21.34 per cent from the previous year, compared with 17.5 per cent in July. Food prices, which makes up nearly a quarter of the consumer inflation basket, rose an annual 19.75 per cent, up from 19.4 per cent in July

Core inflation, which excludes volatile items such as gold and energy, accelerated to 17.22 per cent, compared with 15.1 per cent in July.

The figures come as Turkey raised natural gas and electricity prices on Saturday by as much as 14 per cent, two sources said.

State pipeline operator Botas raised natural gas prices by 14 per cent for industrial use and 9 per cent for residential use effective from Saturday, two sources told Reuters. Botas increased the price of natural gas for electricity production by 50 percent and by 9 percent for residential use.

Turkey’s energy regulator said it would raise electricity prices by 14 per cent for industrial use and 9 per cent for households from Saturday. It increased prices by the same amount last month.

The latest hikes in electricity and gas prices will directly increase inflation by 35 basis points, according to Reuters calculations. President Erdogan, self-described “enemy of interest rates”, wants to see lower borrowing costs to keep credit flowing, particularly to the construction sector. Investors, who see the economy heading for a hard landing, say decisive interest rate hikes are needed to put the brakes on inflation.

Economic attack

The president, who has appointed his son-in-law Berat Albayrak as finance minister, casts the lira's slide as an economic attack on Turkey by Western governments, financiers and ratings agencies.

He says high interest rates cause inflation – a stance at odds with orthodox economics. “We see little chance that an ugly set of inflation figures will change the government’s – and, crucially, President Erdogan’s – stance on interest rates,” Tuvey of Capital Economics said. – Bloomberg / Reuters