A few days ago we discussed how soaring oil prices have been a stagflationary double whammy to emerging markets, which have been hit not only by a surging dollar, resulting in a collapse in local currencies and spiking import costs, but a spike in local currency oil and gasoline prices resulting in a surge in inflation and a slowdown in the economy as local infrastructure grinds to a halt.

This morning, this dynamic was revealed clearly – and painfully for Turkish residents – when Ankara reported that consumer inflation climbed to one of the highest levels since President Recep Erdogan came to power 15 years ago, spurring more calls for higher interest rates to rein in prices or at least for Erdogan to normalize relations with the US.

Turkish inflation soared to 24.5% in September from a year earlier (up 6.3% on the month, the highest since April 2001), rising for the 6th consecutive month driven by an across-the-board spike provoked by the lira’s meltdown; it was also the highest since June 2003 and rising above all Wall Street expectations where the median estimate was 21.1%. Worse, the CPI print was higher than the central bank’s policy rate of 24% suggesting more rate hikes are now imminent… but will Erdogan agree?

Medley Global analyst Nigel Rendell said the inflation figure was “a shocker” but said he was cautiously optimistic that weak consumption might offset inflationary pressures at some point.

“Interest rates of 24 percent provide some protection, and there is a sense that the weakness of domestic demand will be the dominating disinflationary force in a few months’ time once the foreign exchange pass-through has fed its way through the system.”

As the following key highlights from the Turkstat report show, the price increases was broad based across virtually all categories (via Bloomberg):

  • Food prices, which make up nearly a quarter of the inflation basket, rose an annual 27.7 percent, from 19.8 percent in August
  • Energy inflation accelerated to 27.03 percent from 21.3 percent
  • Producer prices rose 46.15 percent from 32.13 percent
  • Core inflation, a gauge that excludes volatile items such as food, energy and gold, climbed to 24.05 percent from 17.2 percent; median estimate in a Bloomberg survey called for an acceleration to 19.3 percent
  • Apparel prices rose 17.16 percent from 13.6 percent and the cost of housing rose 21.84 percent from 16.3 percent

Commenting on the soaring prices, Turkey’s Treasury and Finance Minister Berat Albayrak blamed hoarders and speculators, and predicted inflation would stop quickening in October. Whether that is the case remains to be seen, but the latest inflation report put the central bank – already frowned upon by Erdogan – in a bind, as its recent interest rate hike to the highest level in nearly two decades, has failed to halt price increases which have exploded in 2018.

“An inflation print so bad that it truly feels like old Turkey,” said Inan Demir, an economist at Nomura International in London. “But this is simply too bad to ignore. Note that annual headline inflation is now above the bank’s policy rate at 24 percent, which calls for another rate hike.”

Not only is CPI now higher than Turkey’s official interest rate, but it is almost five times the central bank’s target of 5 percent and almost double its 2018 forecast. Meanwhile, given Erdogan’s distaste for higher rates and the sudden slowdown in the economy, the central bank now finds itself trapped with little room to hike rates further.

And with the lira losing 40% of its value against the dollar since the beginning of the year, the worst may be yet to come, especially since today’s inflation report sent the lira sharply lower, reversing gains achieved in recent days.

As noted above, speaking after the data release, finmin Albayrak attributed much of the increase to “hoarding and speculative pricing by businesses taking advantage of volatility.” Yesterday, Erdogan urged citizens to report any businesses that were seen as gouging consumers; it was not clear what the punishment would be for enterprises who had the temerity of trying to pass through prices, the result of the lira’s collapse, to consumers.

Turkish officials will soon be meeting representatives of various sectors of the economy for a new framework to curb prices that the government will likely announce next week, he said.

“The current trend will be broken in October,” Albayrak promised, although judging by the Turkish lira, the market is not so confident.

Another problem is the speed with which CPI is catching up with producers’ rising costs, said BlueBay Asset Management LLC strategist Tim Ash. Producer prices exploded in September, rising 10% from the previous month, and over 46% from a year ago.

So what can Turkey do to end this toxic spiral into economic collapse? According to Ash, given the sudden economic slowdown, there is little justification to raise rates at this point, but the strategist said that the government should end its spat with the U.S. over the detained U.S. pastor to relieve market turmoil and pressure on the central bank. In light of Erdogan’s continued war of words with the US, this will not happen until Turkey is in a deep depression… and even that is not certain.

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