Turkey’s annual inflation rate soared to a record high of 47.83% in July, up from 38.2% in June, as the Turkish lira continued to lose value against the US dollar and the euro. The lira has depreciated by more than 40% since the start of the year, amid political uncertainty, economic mismanagement, and US sanctions.
The inflation rate exceeded market expectations of 47% and was the highest since the country adopted a new consumer price index in 2003. The previous record was 45.21% in October 2021.
The main drivers of inflation were food and non-alcoholic beverages, which rose by 54% year-on-year, followed by hotels, cafes and restaurants, which increased by 52.9%. Other categories that saw significant price hikes were health (65.7%), furnishings and household equipment (43.2%), recreation and culture (43%), and transportation (21%).
The core inflation rate, which excludes volatile items such as food and energy, also jumped to 47.33% in July, up from 46.62% in June.
The soaring inflation rate has eroded the purchasing power of Turkish consumers and businesses, who have faced rising costs of living and production. Many have resorted to buying foreign currency or gold to hedge against the lira’s depreciation.
The central bank has raised its key interest rate by a cumulative 1,500 basis points since November 2021, reaching 24% in June 2023, in an attempt to curb inflation and support the lira. However, the monetary tightening has failed to restore confidence in the currency and the economy, as President Recep Tayyip Erdogan has repeatedly criticized the high-interest rates and called for lower borrowing costs.
Last week, the central bank more than doubled its year-end inflation forecast to 42.9%, citing the exchange rate developments, supply-side factors, and pandemic-related uncertainties. It also revised its growth forecast for 2023 down to 4.8% from 5%.
Analysts expect inflation to remain high in the coming months, as the lira faces further downward pressure from geopolitical tensions, US sanctions over Turkey’s purchase of Russian S-400 missile systems, and a possible snap election before the scheduled date of June 2024.