As Turkey’s inflation slows in November, all eyes now on pay hikes

Turkey’s annual consumer inflation eased to 84.4% in November from a 24-year high of 85.5% the previous month, slowing for the first time in 18 months, official data showed Monday.

Prices rose 2.9% on a monthly basis in November, the Turkish Statistical Institute said. Turkey’s inflation was stoked by a series of unorthodox rate cuts by the central bank starting in September 2021 that sent the Turkish lira into a tailspin. 

The fall in the annual inflation rate was in line with expectations and owed largely to the statistical effect of the high base the same month last year. Month-on-month price increases have averaged about 3.5% in the past two years. Even if they still top 3% in December, annual inflation is expected to drop to somewhere between 65% and 70% due to the favorable base effect. But despite the falling annual rate, consumers are likely to face monthly price increases averaging 3% to 4% next year.

President Recep Tayyip Erdogan — headed for a tough reelection test after two decades in power — is expected to portray the annual fall as proof that his controversial economic policy is paying off. “Did we go down to single digits on the interest rate? We did. And it will continue like this. Don’t worry, inflation, too, will go down,” he said in a recent speech. The central bank delivered the rate cuts at the behest of Erdogan, who holds the unconventional view that high interest rates cause high inflation. Last month, the bank lowered its policy rate by 150 basis points to 9%, bringing it to single digits as Erdogan had urged. 

Of note, food prices — a main driver of Turkey’s inflation and a top popular grievance — rose 5.75% in November from the previous month and 102.5% year-on-year. Food inflation is likely to remain sticky, given that price increases in key agricultural inputs such as fertilizers, diesel, pesticides and fodder hit an annual of 138% in September, while longstanding structural problems continue to plague the sector and government support for farmers remains limited. 

Meanwhile, producer inflation rose 0.74% on a monthly basis in November to reach an annual of 136%, Monday’s data show. The 51.5-percentage-point difference between the producer and consumer inflations shows that the reflection of producer prices on consumer prices has a long way to go.

The inflation rate will bear on pay hikes at the turn of the year. Out of nearly 32 million people employed in Turkey, 22 million — 69% — are wage-earners, according to September data. Among them are about 5 million public servants, who are relatively shielded against inflation as they receive pay hikes covering the inflation of the preceding six months twice a year. The same goes for about 13 million pensioners. For the first half of 2023, the pay hikes of public servants and pensioners are expected to reach 18.5% and 15%, respectively. 

As for the private sector, the monthly minimum wage has grown increasingly prevalent over the years, becoming the pay of nearly half of 17 million wage-earners in the private sector.

In the European Union, about 4% of employees work for the minimum wage or slightly higher salaries, while the pays of the rest are largely determined through collective labor contracts, according to Eurofound data. In Turkey, 43% of employees in non-agricultural sectors earn the minimum wage or less, with the rate reaching 50% in the industry, a central bank survey shows. The rate stands at 54% in the construction sector, at least 59% in textile and apparel sectors, 65% in the food industry and 72% in the tourism sector. 

The core reason for this phenomenon in Turkey, observers say, is that millions are unable to use their constitutional right to unionization, collective bargaining and strike, deterred by pressure from employers. Less than 10% of employees benefit from collective labor contracts, with the rate dropping to less than 6% in the private sector, according to official data. 

The hikes to the minimum wage and others will be announced later this month in a political climate marked by the upcoming elections, due in June at the latest. Erdogan is widely expected to use the hikes as an election gimmick. 

Turkey’s largest confederation of workers unions, TURK-IS, said ahead of talks with the government that the minimum wage of 5,500 liras ($295) should be raised to at least 7,785 liras ($418). Its position came under fire because it had announced the same sum as a hunger threshold — the monthly cost of a healthy diet for a family of four — last month. 

Still, speculation is rife that Erdogan might greenlight a sum close to 10,000 liras ($536) — a prospect that has raised eyebrows among employers.