Turkish inflation at all-time high: What are the consequences and prospects?

Turkey’s June consumer price inflation (CPI) came in much higher than expected pointing at an all time high since 2003 at 15.39 percent.  What is worse, such level is not the peak of 2018 given the lira’s weakness, higher price of oil and delayed price increases before June 24 elections.  Thus, for August it would be rational to expect CPI inflation edging higher to 18-20 percent range to end the year at around 14-15 percent.  No need to say such a high inflation will be feeing lira’s depreciation as it is the case the morning following the June inflation readings. 

In the wider sense, the post election period Turkish economy remains on the edge as the administration has yet to name the economy management team.  The current account deficit at 6.4 percent of GDP and Turkey’s huge external financing requirement at 237 billion dollars for the next 12 months is the Achilles Heel.  The combination of an economic contraction in the third quarter and recession afterwards with double digit high inflation translates into stagflation; a phase in the Turkish economy good enough to shy investors further away given the global financial conditions and looming uncertainties with regards to the new “presidential system”.

While the eyes have now turned to Turkey central bank for a rate hike of 100-200 basis points that has a scheduled monetary policy council on July 24; the key to reversing the deterioration is of course a credible, realistic macro policy frame.  Whether the presidential advisors who are expected to take key places at Erdogan’s next team of administration can have such a vision is to be seen.