Turkey had the smallest deceleration in consumer prices since a slowdown that began last November as one of the lira’s worst stretches in decades makes imports more expensive.
Inflation reached 38.2% in June from a year earlier, according to official data published Wednesday, slightly less than forecast and down from 39.6% in May.
Though the lira’s steep declines didn’t completely break the disinflation momentum, the depreciation in the currency is stirring up price pressures just as the government moves ahead with measures that include an interim hike of 34% in the minimum wage while looking into raising civil servant pay and pensions.
Core inflation — which strips out volatile items — rose an annual 47.3%, up from an annual 46.6% the previous month in signs that price pressures remain elevated.
The lira has lost about a quarter of its value against the dollar since President Recep Tayyip Erdogan won reelection victory in May and revamped his economy team.
Read more: Lira Slump Deepens as Turkey Insists on Gradual Changes
Price stability will prove elusive as two former Wall Street bankers now in charge of the economy undo years of complex regulations and fringe policies that kept the lira in check by burning through central bank reserves.
What Bloomberg Economics Says...
“Looking ahead, we expect government policies and the sharp lira depreciation to result in the inflation rate climbing again. In our view, price gains will accelerate toward a year-end rate of 47%, even after the central bank’s policy pivot to lifting borrowing costs.”
— Selva Bahar Baziki, economist. Click here to read more.
The threat of another inflation spiral adds urgency for newly installed Finance Minister Mehmet Simsek and central bank Governor Hafize Gaye Erkan. Policymakers have for now signaled that a return to a more conventional approach will be gradual, as they reduce support for the lira and raise interest rates for the first time in over two years.
In the months ahead, analysts expect inflation to accelerate past 40% again and stay there through the first half of 2024. Bloomberg Economics revised its year-end call to 47% from 43%, meaning price growth may run at over nine times the official target of 5%.
A weaker lira was top of mind as the central bank reviewed rates last month, according to minutes of the meeting, which marked what it called was the “first step” of a monetary tightening cycle.
The decision to increase the benchmark to 15% from 8.5% — a move that fell short of many forecasts — was meant to “establish the disinflation course as soon as possible,” the central bank said in the summary published on Monday.
--With assistance from Joel Rinneby.
