Turkish inflation is 40 percent, top U.S. economist says

Turkey’s inflation rate is almost 40 percent, a renowned U.S. economist said.

The Turkish lira has collapsed since President Recep Tayyip Erdoğan became president in August 2014, leading to a surge in inflation, Steve Hanke, professor of applied economics at John Hopkins University, said in an analysis for the biweekly Forbes magazine.

While official inflation is 10.9 percent, purchasing power parity allows for a calculation of inflation based on changes in the exchange rate, which is 39.2 percent, Hanke said.

Hanke, who has advised dozens of world leaders on currency reform and how to tame hyper-inflation, said he measured the implied inflation rate in Turkey on a daily basis by using PPP to translate changes in the lira-dollar exchange rate into annual inflation.

The causes of the high rate of inflation are central bank policies, which have been “too loose for too long”, producing big growth in the money supply, Hanke said.

The money supply has grown at a rate of 16 percent since 2014 and 18 percent since 2016, Hanke said. That compares with the 13 percent growth needed to meet the central bank’s inflation goal of 5 percent, he added.

There has also been a decline in the quality of money, with the central bank replacing its dwindling foreign currency reserves with liras, Hanke said.

Demand for lira-denominated assets is also deteriorating as profit margins narrow because of the lira’s decline, Hanke said, citing the carry trade. For example, Japanese investors borrow in yen at low rates of interest to buy liras and earn higher returns.

“It is unlikely that the central bank will put the brakes on the growth of the money supply,” Hanke said. “It is also unlikely that Erdoğan will condone the much higher interest rates that would be required to make the carry trade attractive again.

“To ramp-up the carry trade and stimulate the demand for lira, interest rates would have to be north of my measured inflation rate of almost 40%. Not a pretty picture.”