Turkey's official inflation rate has decelerated to 39.6% following President Erdoğan's promise to provide free natural gas in May. The Turkish Statistical Institute (TÜİK), a government-run organization, reported this figure, which aligns with expectations. The decline in inflation can be attributed to the government's decision to offset price increases in other goods by offering free natural gas.
In calculating the consumer price index (CPI) for May, TÜİK employed a "zero price" approach for natural gas. This methodology was implemented after President Recep Tayyip Erdoğan secured re-election last month.
The government had pledged to provide free gas throughout May and continued to offer a monthly allocation of 25 cubic meters at no cost until May 2024. This commitment is estimated to cost the government 40 billion lire ($1.89 billion).
According to TÜİK's data, consumer prices rose by 0.04% compared to the previous month. Conversely, the domestic producer price index increased by 0.65% every month, resulting in an annual rise of 40.76%.
However, unofficial data from the independent ENAG Inflation Research Group, established in 2020 to monitor Turkey's inflation, suggests that the annual consumer price inflation rate is significantly higher than the official claims, as has been the case historically.
ENAG's analysis indicates that if natural gas prices remained unchanged in May, the monthly consumer price index would have risen by 7.35%, while the annual CPI would have increased by 109.01%.
Applying the same "zero price" methodology for natural gas, ENAG's calculations reveal that the CPI increased by 5.68% in May and 105.45% over 12 months.
Inflation in Turkey has been fueled by a currency crisis in late 2021, reaching a 24-year peak of 85.51% in October. However, with a favorable base effect and a relatively stable lira, it gradually eased to 43.68% by April.
Erdoğan has consistently advocated for monetary stimulus in recent years, aiming to achieve price stability by reducing borrowing costs, boosting exports, and transforming chronic current account deficits into surpluses.
In a significant development, Erdoğan appointed Mehmet Şimşek as Treasury and Finance Minister over the weekend. Şimşek, highly respected by financial markets, is expected to pave the way for a return to more conventional policies, potentially including interest rate hikes in the coming months.
Analysts caution that the extent to which Şimşek is granted independence will greatly influence the efficacy of this shift towards orthodoxy, given Erdoğan's past tendencies to revert to rate-cutting strategies despite previous episodes of embracing orthodox measures.
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