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Inflation in Turkey has fallen for the first time in eight months, bolstering policymakers’ hopes that the country’s long-running cost-of-living crisis is easing, a year after Ankara launched a sweeping economic recovery plan.
Consumer prices rose 71.6 percent in June from the same month a year earlier, according to official data, slower than expected and down from a nearly two-year high of 75.5 percent in May.
The drop in inflation is one of the strongest signs so far that Turkey is starting to see results after the re-election of President Recep Tayyip Erdoğan in May last year.
The centerpiece of the new program, which is slowly pulling out foreign investors who have left the market in recent years, is the huge increase in borrowing costs. The central bank raised its key interest rate to 50 percent in March from 8.5 percent in June last year in an attempt to curb uncontrollable price growth.
“The disinflation process has begun,” Finance Minister Mehmet Şimşek said after Wednesday’s inflation report. “We will ensure a permanent increase in prosperity by resolutely implementing our program until we achieve price stability.”
Monthly inflation also fell sharply to 1.6 percent in June from 3.4 percent in May, according to data released Wednesday by the Turkish Statistical Institute. The cost of clothing, footwear and transportation both fell in June from May, although house prices continued to rise sharply.
However, several economists noted a large discrepancy between the official figures and another dataset that measures prices in Istanbul, home to a fifth of Turkey’s population.
The Istanbul Chamber of Commerce (ITO) found that prices in Istanbul rose at an annual rate of about 82 percent in June. Selva Demiralp, an economist at Istanbul’s Koç University who closely monitors inflation figures, noted that the national figures were “surprisingly low” compared to the ITO figures.
There is also a risk of another setback in July, when authorities are likely to raise prices under their control, such as electricity rates, said Hakan Kara, former chief economist at Turkey’s central bank.
Still, local and foreign economists generally expect inflation to fall further in the coming months, which could lead to interest rate cuts later this year or early 2025. Local businesses expect consumer price growth to fall to 44 percent by the end of this year, although they still predict double-digit inflation in five years, a recent central bank survey showed.
Other recently released data underscore expectations that the new economic program led by Şimşek is slowly cooling parts of Turkey’s $1 trillion economy.
The auto market, which has been overheated for years as Turks bought cars in an attempt to protect their savings from inflation and the massive fall of the lira, has recently gone into reverse.
Data from the Automotive Distributors and Mobility Association showed retail sales of passenger cars and light commercial vehicles fell 5.3 percent year-over-year in June.
Activity in Turkey’s manufacturing sector contracted for the third straight month in June, with companies raising prices at the slowest pace in four and a half years, according to the Istanbul Chamber of Industry’s purchasing managers’ index.
“The ongoing period of subdued demand is starting to be felt more acutely in the manufacturing labor market, with Turkish firms reluctant to replace departing workers and thus cutting employment by the largest extent since October 2022,” Andrew Harker, chief economic officer at S&P Global Market Intelligence, said in the PMI report.
Despite the slowdown in Turkey’s business environment, policymakers are still struggling to reduce high inflation expectations among consumers, who have seen their savings shrink in recent years.
Turkish consumers are predicting year-end inflation of around 90 percent, according to a June survey by Istanbul’s Koç University. Of those surveyed, 88 percent said it was a good time to buy long-lasting goods — a sign of caution over promises of a turnaround.