Turkish inflation dips under 40 pct for first time in 17 months

ISTANBUL

Türkiye's annual inflation rate dropped below 40 percent in May for the first time in 17 months, pushed down by a temporary offer of free gas to households, official data showed on June 5.

Consumer prices rose by 39.6 percent on an annual basis and were almost stable, at 0.04 percent, compared to the previous month, according to the Turkish Statistical Institute (TÜİK).

TÜİK said last week that it would apply a "zero price" method for natural gas in the consumer price index (CPI) calculations for May, a month in which President Recep Tayyip Erdoğan won reelection.

The government had pledged ahead of last month's elections that it would provide free gas in May, and a monthly free 25 cubic meters until May 2024. The move is seen costing the government 40 billion Turkish Liras ($1.89 billion).

The weight of natural gas in the inflation basket is 2.9 percent.

Among the main expenditure groups, clothing and footwear witnessed the lowest annual increase, with a rate of 19.49 percent. In contrast, hotels, cafes, and restaurants registered the highest annual increase at 68.98 percent.

Housing prices, which include natural gas, dropped 13.79 percent on a monthly basis, and were the only group to record a decline last month, lowering the overall monthly reading by 2.09 percentage points.

On the other hand, clothing and footwear saw the highest monthly increase, rising by 9.85 percent.

The domestic producer price index was up 0.65 percent month-on-month in May for an annual rise of 40.76 percent, according to the TÜİK data.

Inflation was stoked by a late-2021 currency crisis and it touched a 24-year peak of 85.51 percent in October. It eased to 43.68 percent by April with a favorable base effect and relatively stable lira.

Erdoğan has urged monetary stimulus over the last several years, aiming to achieve price stability by slashing borrowing costs, boosting exports and flipping chronic current account deficits to surpluses.

But Erdoğan, who was elected for his third term, appointed Mehmet Şimşek, who is highly regarded by financial markets, as treasury and finance minister. The move was seen as setting the stage for a return to more orthodox policies, including rate hikes in coming months.

“For sustainable development, establishing fiscal and price discipline will be our main priority,” Şimsek said at a ceremony on June 4 in Ankara, where he took over the post from Nureddin Nebati.

Türkiye has no other choice but to return to a rational ground, a rule-based, predictable Turkish economy will be key to achieving the desired prosperity, Şimşek added.

“Our main aim is to boost social welfare. Transparency, consistency, predictability and compliance with international norms will be our basic principles in achieving this goal,” Şimşek said.

It is significant for Türkiye, in the medium-term, to bring down inflation to single digits, to increase predictability and to ramp up institutional transformation, which will help reduce the current account deficit, Şimsek said.

“We will prioritize macro-financial stability by strengthening the institutional quality and capacity at a time when global challenges and geopolitical tensions heighten,” he added.