Turkey’s inflation tops 80% as poverty worsens

With presidential and parliamentary polls less than a year away, the Turkish government has banked on growth to contain popular grievances, but runaway inflation and the foreign currency crisis are deepening poverty.

Consumer prices in Turkey rose 1.46% from July to August, official data showed on Monday, with annual inflation hitting a 24-year high of 80.21%.

Inflation has soared since September 2021 amid the fall of the Turkish lira, fueled by unorthodox central bank rate cuts. The spike in global energy and commodity prices after Russia’s invasion of Ukraine in February only made matters worse.

Announcing new inflationary pressures, the Turkish authorities announced on 1 September new increases in gas and electricity prices, of around 20% for households and around 50% for companies.

Energy expenditure is a major item in the housing category of the inflation basket, where prices rose 2% in August, bringing the annual rate to nearly 72%.

Food prices rose by around 0.9% in August, with annual food inflation hitting 90.3%. The price of bread alone – a much-needed staple for low-income consumers – has risen more than 101% year on year.

The recent relative easing in global energy prices led to partial reductions in gasoline and diesel prices last month, contributing to a 1.8% decline in prices in the transportation group. Nevertheless, the annual inflation in this category was 117%.

Prices for durable goods such as furniture, appliances and electronics rose 3.3% in August. The rise over several months has brought annual inflation in the sector to more than 92%.

Driven by the high tourist season, prices in the hotels, cafes and restaurants group increased by around 3.3% in August, with the annual rate rising to nearly 81%.

And with the advent of the new school year, prices in the education group jumped 6.5% in August. In the healthcare group, price increases reached 7%.

As a further sign of further consumer price increases in September and the following months, the pace of producer prices remained faster. A monthly increase of 2.4% in August pushed annual producer inflation to a staggering rate of almost 144%.

In addition, the 12-month average of producer inflation in October will form the basis for next year’s increases in public sector goods and services. This means that state fees and charges and the prices of public transport and other services would be increased by around 125%, which alone is an omen that the inflationary storm will barely subside in 2023. .

The working classes can hardly cope with inflation exceeding 80%, because ostensible wage increases lag well behind price increases. With real incomes sinking, relative poverty is worsening – a trend confirmed by the latest gross domestic product (GDP) data, released on August 31.

On the flip side, President Recep Tayyip Erdogan’s ambitions to keep the economy warm despite soaring inflation translated into GDP growth of 7.5% in the first half of the year. Turkey’s GDP had grown by 11.4% in 2021. Yet the factors that contributed to this expansion are hardly sustainable.

GDP growth has been achieved mainly through cheaper exports and a rush for goods among consumers scrambling to hedge their savings against inflation.

Amid the continued fall of the Turkish lira and the uncertainty caused by Ankara’s interventions to rein in foreign currency prices, many savings holders have opted to put their money in homes, cars and durable household goods. This apprehensive consumer trend has provided headwinds to the industrial and service sectors. In addition, the competitiveness of Turkish exporters has increased due to the depreciation of the lira. But accompanying inflation, coupled with an alarming current account deficit and Treasury deficits, is clouding hopes of sustaining that pace of growth for the rest of the year.

Moreover, economic growth has worsened income disparities. Payments to employees amounted to 25.4% of gross value added in the second quarter of the year, compared to 36.8% in the second quarter of 2019, the year before the pandemic. The net operating surplus—or employers’ share—grew from 45% to 54% over the same period. The labor share of 25.4% is the lowest under the 20-year rule of Erdogan’s Justice and Development Party.

The net operating surplus of companies, particularly in the financial sector, has increased sharply over the past year in particular. Korkut Boratav, a veteran Turkish economist, attributes the widening of the income gap to three main reasons: “the excessive injection of cheap credit to businesses by the central bank, public banks and the [Erdogan’s administration]; the refusal to [adequate] the public financial resources to the workers and the unorganized state and the impotence of the popular classes in the face of the inevitable inflation. For Boratav, it’s “an environment of wild capitalism”, with banks and corporations “running the show within the framework created by the Palace”.

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