Turkish inflation accelerates to 36.1 percent after lira’s crash

Turkey’s annual inflation rate jumped to 36.1 percent in December, the highest level since 2002, after the lira slumped to successive record lows, forcing retailers and manufacturers to hike prices sharply.

Inflation in Turkey is surging after President Recep Tayyip Erdoğan ordered the central bank to cut interest rates to 14 percent from 19 percent since September, prompting investors and locals to sell the lira in droves. Erdoğan says higher interest rates are inflationary and are against Islamic teachings.

Inflation accelerated from 23.1 percent in November, the Turkish Statistical Institute said on Monday. Prices rose by a monthly 13.6 percent. The inflation number was higher than all 22 economists expected in a poll last week by Bloomberg HT television, which predicted a rate of 29.6 percent.

"The cost of the error that "interest rates are the cause, inflation is the result" is only just starting to be reflected on inflation and on all of us," said Güldem Atabay, an economist and former director of research and strategy at Egeli&Co. Asset Management in Istanbul.

The lira was trading down 1 percent at 13.66 per dollar after the data was published. The currency lost 44 percent of its value last year.

Producer price inflation surged to an annual 79.9 percent last month from 54.6 percent in November, the institute said. Month-on-month, prices increased by 19.1 percent, reflecting a surge in the cost of imports.

"An 80 percent producer price increase shows that the fire of inflation will continue to burn at full speed in January and February. Stop this 'experiment' now," said Uğur Gürses, a columnist and former Turkish central banker.

Turkey raised electricty prices by 50 percent and natural gas prices by 25 percent in a decision at the weekend, indicating that inflationary pressures will persist this month. Prices were raised by 100 percent and 50 percent, respectively, for commercial users.

Inflation in Turkey now dwarfs the levels reached during a currency crisis in 2018, when the increase in consumer and producer prices accelerated to as high as 25.2 percent and 46.2 percent, respectively. Three years ago, the central bank hiked interest rates sharply to deal with inflation. Erdoğan has said there will be no repeat of that policy.

Consumer price inflation is almost double the central bank's 2021 target of 18.4 percent. Its medium-term goal is to slow inflation to 5 percent.

Sharp losses for the lira have increased the price of imported goods and materials. The lira hit a record low of 18.36 per dollar on Dec. 20. It then rallied the same day after Erdoğan announced a plan to protect lira deposits against currency losses. It traded as strong as 10.15 per dollar on Dec. 23 before selling off again.

The law now requires that the central bank publish a letter to the government explaining why it missed its 5 percent inflation goal in 2021. But the requirement, meant to strengthen the independence and accountability of the central bank, has lost meaning. Erdoğan hand-picked governor Şahap Kavcıoğlu in March after sacking his predecessor for raising interest rates. He has also replaced most members of the bank's Monetary Policy Committee, which sets interest rates.

Independent inflation research group ENAG published a report on Monday showing that consumer price inflation accelerated to 82.8 percent in December. ENAG, based in Istanbul, says it uses a very similar basket of goods to measure price increases as the statistics agency. 

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