Turkish Inflation at 20-Year High Signals Worst Is Yet to Come

(Bloomberg) -- Turkish consumer inflation jumped to a fresh two-decade high in February, while the surge in producer prices show the worst is yet to come.

Inflation accelerated to 54.4% last month, up from 48.7% in January, more than the 52.5% median estimate in a Bloomberg survey. The lira dropped on the news and was trading 0.8% lower at 14.1335 per dollar at 10:44 a.m. in Istanbul.

Consumer price gains -- already at their highest since March 2002 -- will get another boost from producers, where inflation breached past 105%, the worst reading since 1995. Prices were driven by a weak lira and a surge in the cost of food and energy. Russia's invasion of Ukraine will only add to those woes with global oil prices well above policy maker's expectations for the year.

Producer prices will set the “path” for consumer inflation, which will edge toward 60% during the third quarter, said Enver Erkan, an economist at Tera Yatirim. Inflation will decelerate toward 45% by the end of 2022, Erkan said.

Negative Yield

Turkey's central bank expects year-end inflation at 23.2%, more than four times its target, after rate cuts in 2021 weakened the lira. But that estimate was based on oil at $80.4 a barrel. With crude prices at an 8-year-high having topped $115, Turkey's energy import bill will rise further.

That's bad news for President Recep Tayyip Erdogan's re-election bid next year as a cost-of-living crisis drains some support. Erdogan said Tuesday that inflation “will be under control” by the summer.

With the president vowing to use the cheaper lira to turn Turkey into a manufacturing power, interest-rate hikes aren't on the agenda to curb price gains. Thursday's data pushed Turkey's real yield adjusted for inflation to around negative 40%, the lowest among emerging market peers.

That already sent the currency to a tailspin. It's down more than 47.2% from a year ago, more than any other major currency tracked by Bloomberg.

The lira's depreciation, along with the rally in global commodity prices, caused a broad-based increase in prices last month. Below are the highlights of the inflation report published by Turkstat:

Producer prices rose 7.2% through the month, bringing annual inflation to 105%
The rate of inflation in energy stood at 83% from 76.4% in January, led by gasoline and power costs. Turkey has recently cut taxes on household power consumption but the impact will only be seen from March
Annual price gains in food, which makes up roughly a quarter of the consumer basket, accelerated to 64.5% from 55.6%, even after the government cut taxes on food
A core inflation index, which strips out the impact from volatile items such as food, energy and gold, rose to 44.1% from 39.5% in January

What Economists Say

The war in Ukraine is adding pressure on Turkey's external financing costs and currency, said Gizem Oztok Altinsac, chief economist of Turkish Industry & Business Association, before Thursday's data “We had predicted before the Ukraine crisis that Turkish inflation would touch 60% in May or June. Now, upside risks have emerged on our forecast,” she said.