Will Turkey Continue to Insist on its Current Monetary Policy?..

The most important news of yesterday morning was the inflation rates announced by TurkStat. But before we move on to the CPI analysis, let’s take a look back at last week.

Although it was not a record high level, the cost-of-living index announced by Istanbul Chamber of Commerce on Friday revealed a considerably high monthly inflation. Exceeding 6% on a monthly basis and 60% on an annual basis, Istanbul’s Consumer Price Index was an important sign of the CPI announced yesterday. And as we saw yesterday, the CPI turned out to be higher than 60%.

In my previous reports, I said that inflation will remain at a high level until summer, but it is likely to finish 2022 at 40% if Turkey does not experience any more negative events abroad and at home. However, the CPI will quite probably remain high until the end of the year, giving the side effects of the Russia-Ukraine crisis and the successive price hikes. According to most analysts, Turkish economy will end the year with an inflation rate of around 45-50%.

“What Can Happen by the End of the Year?..”

Let’s make a simple calculation for inflation: Considering the CPI rates in January, February and March which were respectively 11.1%, 4.81% and 5.46%, the monthly average inflation rate should remain at 2% for the rest of the year in Turkey, so that the forecast of 45-50% turns out to be correct. Any monthly CPI figure that will be above this rate will make it difficult for us to see even this “pessimistic” scenario.

On the morning of 1 April, we woke up to another increase in natural gas prices. Although the indirect taxes on essential goods were reduced, consumers will not actually be able to perceive it because of the ever-rising prices. In fact, given the prices are increasing at much higher rates than the reduced tax rate, the Government will not lose too much tax revenue in absolute terms. The only downside for the Government is that it might not be able to collect higher amounts of taxes. Indirect tax collection may not decrease as much as thought despite the recent tax cuts unless price hikes are brought under control.

The real question is this: When will the incomes of the citizens increase as much as the cost of living? In other words, when will people be able to purchase the number of goods and services they could purchase before the inflation rally began? In food retail, companies are trying to maintain customer retention using different methods such as reducing the size of packages and the number of items in them. By doing so, they can at least provide the same quality in smaller packages. However, if the costs continue to rise, people may have to make tough choices about quality and hygiene.

Sadly, this is what might lie ahead for Turkish people, who are not already leading a healthy lifestyle. For a long time now, we have been focused almost only on inflation, interest, and exchange rate risks. I think we should be aware of risks that lay behind the curtain as well.