Turkey's inflation slows most in December in a boost to Erdogan

Turkish consumer prices rose 1.18% month-on-month in December, while annual inflation dropped to 64.27%, down nearly 20 percentage points from the previous month thanks mainly to a favorable base effect, official data showed Tuesday. 

The trend is expected to continue in the coming months as the government tries to take the credit for the decline in the lead-up to crucial elections.

The steep slowdown in December — after annual inflation peaked to a 24-year high of 85.5% in October and eased slightly to 84.4% in November — was an expected outcome because of the high base effect from the corresponding month the previous year. Prices had surged by a staggering 13.6% on a monthly basis in December 2021, amid a currency shock triggered by unorthodox rate cuts by the central bank at the behest of President Recep Tayyip Erdogan.

This statistical effect will continue in the coming months, with annual inflation likely to drop all the way to about 30% by March. 

Food prices — one of the main drivers of Turkey’s inflation — rose nearly 1.9% in December from the previous month, while annual food inflation stood at about 78%, down from 102% in November owing to the high base effect, data by the Turkish Statistical Institute (TUIK) showed. Milk and dairy products saw the fastest price increases, reflecting the growing hardships in the dairy farming sector. Many producers have quit the sector amid rising costs and declining support from the government. The pace of price increases in flour and baked products has not fallen either. 

Housing prices rose 2.8% month-on-month in December, marking a relative easing that has to do with a number of government interventions. In June, for instance, a temporary law limited rent hikes to 25%. Also, the government has been subsidizing natural gas, thus slowing price increases on gas for power production and home heating. Gas subsidies cost 148 billion Turkish liras ($7.9 billion) from the central government budget in the first 11 months of 2022, only 10 billion liras ($534 million) less than the funds spent on national security, according to official figures.

In the transportation group, meanwhile, prices dropped by some 4% in December from the previous month after sharp increases during the year. Easing global energy prices and the Turkish lira’s relatively small losses versus the US dollar in the past three months have alleviated the impact of fuel hikes on inflation. Still, fuel prices rose 1.2% in December. 

The continuing statistical impact of last year’s rates is likely to bring annual inflation down to roughly 50% in January, about 45% in February and about 35% in March, even if prices continue to rise by about 2% to 3% month-on-month.

The government, which has been bent on promoting growth and enacted no measures to curb inflation as prices rose month after month, is already using this statistical decline to argue that it has begun to combat inflation as it tries to boost its sagging popular support ahead of the polls, due in June at the latest. “Annual inflation will clearly drop to about 40% in several months,” Erdogan said in mid-December after a Cabinet meeting.

“We are determined to do what it takes to bring inflation down to about 20% by the end of 2023 … and to single digits in 2024,” he added. 

Similarly, Treasury and Finance Minister Nureddin Nebati vowed a steady drop in inflation, referring to annual inflation rather than the month-on-month rates. “Along with improvements expected in global commodity prices, exchange rates and expectations, both producer and consumer inflations will continue to drop in the coming period. The drops will be observed every month,” he told the parliament last month. 

But as the monthly price increases continue, both producers and consumers are aware of the statistical distortion. Everyone can see for themselves that the prices of goods and services are increasing, even if in a slower pace.

In this context, some observers see the 12-month moving averages of annual inflation as more indicative of the long-term pace of inflation. In April, for instance, the annual inflation stood at 70%, while the 12-month average was 34.5%, according to TUIK data. By December, the annual inflation dropped to 64.27%, while the 12-month average reached 72.3%.