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What Can We Learn from Turkey’s Inflation Crisis?

The rate of inflation in Turkey has soared to a record high level since 2002, as the country's official statistics revealed. According to the statistics, they are fuelled by a currency crisis exacerbated by President Recep Tayyip Erdogan's unorthodox economic policies.

Consumer prices have increased 36.1 percent year on year last month, which is up from 21.3 percent in the month before, as per the Turkish statistics office.

Rising Prices in Turkey

The Turkish Central Bank's interest rate reductions caused the Lira inflation crisis. In the last 6 months the bank has dropped its rates to 14 percent down from 19 percent. However, economic conditions indicated recovery, with exports rising 33 percent in November. Furthermore, the country's current account surplus reached $3.16 billion in October.

Annual unemployment also reduced by approximately 2% in October, to just over 11%. Turkey's Gross Domestic Product grew by 7% GDP climbed by seven percent in Q3, 2021.

Despite this, Turkey's economic strategy remained unpopular due to increased inflation, with concern that inflation rates could reach 26% within a year. Goldman Sachs even announced expectations of infaltion rates reaching 40% within the next 6 months. 

Additionally, experts have cautioned that the Lira's devaluation imposes a significant burden on the typical Turkish citizens in the face of rising costs. Bread costs have increased by 25% in the last month alone, resulting in huge queues at subsidized bakeries controlled by local governments.

Near Future Economy Prediction

According to one expert, inflation may hit 50% by spring unless the monetary policy is altered.

Rates should be increased aggressively and soon since this is an emergency. However, many experts acknowledged that the central bank was unlikely to intervene.

Last year, Mr Erdogan restructured the central bank's leadership. Since September, the bank has reduced rates to 14% from 19%. The ensuing acceleration of price increases and depreciation of the Lira has wreaked havoc on family and business budgets. The cost of living is likely to continue rising, particularly after recent increases of almost 50% and 25% in the price of electricity and gas, respectively.

The central bank has maintained that transitory factors have pushed prices higher and forecasted in October that inflation would conclude the year at 18.4 percent. Although the central bank's stated objective for inflation is 5%, the rate has been in the double digits for the last two years.

Bottom Line

Turkey's central bank made another move toward reviving the Lira by requiring exporters to sell a quarter of their foreign currency income to the central bank, so bolstering the central bank's rapidly depleting reserves.

In Turkey, the monthly inflation figure has become a politically charged topic, with opposition leaders alleging that the government is pressuring the statistics bureau to under-report price increases.

Prices have recently risen due to temporary variables rather than decreasing interest rates. Monthly inflation in Turkey will begin to decline in January as the currency stabilizes and the government clamps down on arbitrary price rises. This inflation hike has been a critical issue to consider for future gold investments that can hedge positions against inflation.