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Turkey’s inflation rate cooled for the first time in eight months, boosting politicians’ hopes that a long-running cost-of-living crisis is easing a year after Ankara launched a sweeping economic turnaround plan.
Consumer prices rose 71.6 percent in June from a year earlier, slower than expected, and fell from a near two-year high of 75.5 percent in May, according to official data.
The drop in inflation is one of the strongest signs yet that Turkey’s shift away from unconventional monetary policy following President Recep Tayyip Erdoğan’s re-election in May last year is beginning to bear fruit.
The centerpiece of the new program, which is slowly drawing back foreign investors who have left the market in recent years, has been a huge increase in borrowing costs. The central bank raised its main interest rate from 8.5 per cent in June last year to 50 per cent by March in an attempt to stem a sharp rise in prices.
“The disinflation process has started,” Finance Minister Mehmet Şimşek said after Wednesday’s inflation report. “We will ensure continued welfare gains by pursuing our program with determination until we achieve price stability.”
The monthly inflation rate also fell sharply to 1.6 percent in June from 3.4 percent in May, according to data released by Turkey’s statistics office on Wednesday. Clothing and footwear costs and transport costs fell in June from May, although housing prices continued to rise sharply.
Still, several economists noted a wide gap between the official figures and another data set that measures prices in Istanbul, home to a fifth of Turkey’s population.
The Istanbul Chamber of Commerce (ITO) found that prices in Istanbul rose by around 82 percent year-on-year in June. Selva Demiralp, an economist at Istanbul’s Koç University who closely follows inflation data, noted that the national numbers were “surprisingly low” compared to the ITO figures.
There is also the risk of another setback in July, when the authorities are likely to raise prices under their control, such as electricity tariffs, said Hakan Kara, a former chief economist at Turkey’s central bank.
Still, local and foreign economists generally expect inflation to fall further in the coming months, which could lead to a rate cut later this year or early 2025. Local businesses expect consumer price growth to fall to 44 percent by the end of this year, although according to of a recent survey, central banks are still predicting double-digit inflation five years from now.
Other recently released data underscored expectations that the new economic program led by Şimşek is slowly cooling parts of Turkey’s $1 trillion economy.
The car market, which has been overheating for years as Turks bought vehicles to protect their savings from inflation and huge drops in the lira, recently shifted into reverse.
Retail sales of cars and light commercial vehicles fell 5.3 percent year-on-year in June, according to data from the Association of Automotive Distributors and Mobility.
Activity in Turkey’s factory sector fell for a third straight month in June, with groups raising prices at the slowest pace in four-and-a-half years, according to the Istanbul Chamber of Industry’s Purchasing Managers’ Index.
“A sustained period of subdued demand is becoming increasingly felt in the manufacturing labor market, with Turkish firms showing reluctance to replace departing workers, reducing employment by the largest rate since October 2022,” said Andrew Harker, chief economic officer. in the S&P Global Market Intelligence PMI report.
Despite the slowdown in Turkey’s business sector, policymakers are still trying to lower expectations of high inflation among consumers who have seen their savings shrink in recent years.
According to a June survey by Istanbul Koç University, Turkish consumers predict an inflation rate of around 90 percent at the end of the year. 88% of those surveyed said now is a good time to buy durable goods – in a sign of caution over promises that the tide has turned.