Fight against inflation at risk

Turkey’s success in fighting against inflation is starting to be at risk. By the end of this month, it is expected that annual inflation will again reach double digits; in other words, at the end of May, it is expected to exceed 10 percent.

The April increase in the consumer price index (CPI), according to Turkish Statistical Institute (TÜİK) figures, shows that double-digit figures will again be reached. The April CPI figures are more than expected, at 1.34 percent, pulling the annual inflation rate to 9.4 percent. When taking into consideration that last year’s May CPI was 0.15 percent, in the event that this month’s rate goes over 0.7 percent, then the annual CPI increase rate will be over 10 percent. The increases in food and clothes, the high figures in core inflation, and the producer price index (PPI) all show that in May, 0.7 percent will be exceeded. In other words, inflation will most probably again be in two digits.

Central Bank Chair Erdem Başçı sometimes looks as if he is confronting Prime Minister Erdoğan and drawing attention to the fight against inflation but despite this discourse it is apparent that the Central Bank has loosened the struggle against inflation. Otherwise, it would not have been possible for the Central Bank to allow double digits.

After the 2008 global crisis serious declines in inflation rates in all countries were experienced. However, this opportunity was not used very well in our country and inflation rates were not able to be pulled down below 5 percent. The inflation rates that were around 5 and 7 percent, with the effect of the political process experienced, started climbing recently. Even though the Central Bank says it is fighting against inflation, it is apparent that the government does not adequately stand against the inflationist trend. Central Bank Governor Erdem Başçı has been saying for a long time that inflation will reach its peak at the end of May but that it will start going down afterward. However, the Central Bank administration was also not expecting that the peak would be over 10 percent.

Problems in the government view

As a matter of fact, everybody knows that the policies of the government are inflationist policies. It can be openly seen that Deputy Prime Minister Ali Babacan has recently not been able to persuade Prime Minister Erdoğan in the way he used to.

Meanwhile, we see that Prime Minister Recep Tayyip Erdoğan’s discourse on the subject of inflation and interest rates is getting tougher and closer to an ideological manner. It is being observed that the prime minister is increasing his “inflation is a result, inflation is determined by interest rates” discourse.

In addition, Economy Minister Nihat Zeybekçi has started to say frequently that inflation is not so important. Commenting on April’s higher than expected inflation rates, Zeybekçi said this was the result of the high exchange rate and interest rate process that started in December. “We are now talking over the results. The variables toward the future, for instance the interest rate and exchange rate levels, are more effective and more important than inflation for our economy. In other words, inflation today is no more important than the current account deficit, growth and unemployment in Turkey.”  

In short, the government’s view of inflation and interest rates is quite a problematic view.