A warning from Turkey – this is what hyperinflation looks like

·5 min read
Recep Tayyip Erdogan, Turkey's president, at a meeting on the final day of the North Atlantic Treaty Organization - Valeria Mongelli /Bloomberg
Recep Tayyip Erdogan, Turkey's president, at a meeting on the final day of the North Atlantic Treaty Organization - Valeria Mongelli /Bloomberg

Europeans might feel queasy browsing the prices at supermarkets or petrol pumps, but one neighbour is battling a far worse economic situation. Turks are facing a dizzying pace of price rises in one of the world’s inflation hot spots.

Costs on Europe's doorstep are not changing week-to-week but day-to-day, according to Professor Veysel Ulusoy, who leads a group of independent economists trying to keep track.

“In some cases, especially at the beginning of the month, we can see that the daily inflation is around 0.5-1pc,” he says.

“The prices of durable consumer goods change day-by-day, as they depend on the exchange rate. For example, the change in the price of petroleum products has a daily impact on the CPI as it affects both directly and indirectly.”

Turks are stuck in Recep Tayyip Erdoğan’s topsy-turvy world where official statistics are discredited, religion is driving central bank policy and everyone from egg producers to foreign forces are blamed for the highest inflation in decades.

The official inflation measure points to prices rising at a 24-year high of 78.6pc and food costs almost doubling over the last 12 months. But Ulusoy’s ENAG group, which looks at 7m pieces of data every month, thinks the situation in Turkey is even worse.

The group of economists estimate that the inflation rate in Turkey hit a stunning 175pc in June, far higher than the official measure now being discredited by foreign investors.

Even multinational giants are struggling to keep up with the pace of price changes with Apple reportedly having increased prices of its iPhone smartphones twice in just three months.

Erdoğan has blamed everything from foreign influence, to supermarkets and egg producers, who are accused of colluding to raise prices. But economists are clear the blame lies at the door of the Turkish president, who has sparked a self-inflicted economic catastrophe.

Jason Tuvey, an emerging markets economist at Capital Economics, says Turkey’s eye-watering inflation is “a reflection of the damaging policies implemented by President Erdoğan” and his “desire for low interest rates”.

“Inflation will remain at the very high rates for a long time to come,” he says. “Turkey is in a perfect storm of high and rising inflation and policymakers doing the opposite of what they should be doing really to try and tackle it.”

While prices in the country are being boosted by soaring global energy and food costs, Turkey is also suffering from another collapse in the lira and Erdoğan’s bizarre monetary policy.

At a time when central banks are increasing interest rates to tame inflation, Erdoğan is doing the opposite - fanning the flames on prices in defiance of conventional economics.

“Inflation has been the biggest problem of the Turkish economy for years,” says Ulusoy. “The biggest factor is [Erdoğan’s] irrational interest rate policy.”

He adds: “Since October 2021, change in the daily price volatility has been more common.”

The Turkish central bank has been forced by the president to slash interest rates, adding to inflationary pressures. Erdoğan has called interest rates the “mother of all evil” and has cited religion as a reason for cuts.

Economists are also concerned about huge hikes to the minimum wage to cushion the blow of high inflation, fuelling fears that rising pay will chase prices even higher.

Professor Refet Gurkaynak, an economist at Bilkent University in Ankara, says that “high inflation in Turkey predates” the current global surge and notes that prices are currently rising much faster than in Europe.

“The Central Bank of Turkey, under political pressure, is reducing interest rates, which pours gasoline on the fire. Given the policies, there is no surprise that inflation in Turkey is out of control.”

Meanwhile, crumbling confidence in Turkey has worsened the inflation backdrop. The currency has suffered a series of crises in recent years after investors and local residents took fright at Erdoğan’s erratic economic policies.

The volatile lira has plunged by more than a fifth versus the dollar so far this year and almost 80pc over the last five years, pushing up import costs and stoking price growth. Meanwhile, inflation expectations have run out of control and foreign investors have deserted the country.

Tim Ash, emerging markets sovereign strategist at BlueBay Asset Management, says foreign institutional investors have “just given up” despite Turkey having some “hidden positives”, such as favourable demographics, low deficits and “solid” private banks.

“Basically they're long gone, the local market exposure is the lowest it’s been in 20 years,” he says.

“It should be a huge success story but his weird views on interest rates makes people very uncomfortable and obviously the damage is reflected in high inflation.”

Officials have also been fighting a dollarisation effect in Turkey as residents plough their money into safer foreign currencies. Erdoğan has pleaded with Turks to convert their foreign currency savings back into lira, promising to guarantee any losses for holders of the lira if it plunges against rivals.

As the 2023 election comes into view and Erdoğan struggles in the polls, what can turn the tide for the Turkish president?

“Semi-reasonable macroeconomic policies would be a wonderful start,” says Gurkaynak.

“The loss of faith in policy making and the expectation that bizarre policies will be imposed again once markets stabilise have become entranced and this is a political problem.”

Erdoğan trails many of his presidential rivals, including Istanbul mayor Ekrem İmamoğlu, who is touted as a potential top challenger. But ahead of next June’s vote, economists warn Turkey faces high inflation for some time.

Ercan Erguzel at Barclays predicts price rises could peak at almost 100pc in October if the lira faces more “major” pressure on currency markets.

Capital Economics’ Tuvey argues Turkey is at risk of a “full-blown” economic crisis, sparking the threat of social unrest.

“The policies don't really add up properly,” he says. “It might take another five years or more, but I think you would end up with a combined banking, currency and sovereign debt crisis. It does feel like it’s going down that route.”