Turkey’s official inflation slows to 39.6% after Erdoğan's pledge of free natural gas in May

Duvar English - Reuters

Turkish annual inflation fell to 39.59% in May, official data showed on June 5, broadly in line with expectations, largely due to the government offsetting price rises in other goods by providing natural gas free of charge.

The Turkish Statistical Institute (TÜİK) said last week that it would apply a "zero price" method for natural gas in the consumer price index (CPI) calculations for May, a month in which President Recep Tayyip Erdoğan won re-election.

The government had pledged ahead of last month's elections that it would provide free gas in May, and a monthly free 25 cubic metres until May 2024. The move is seen costing the government 40 billion lira ($1.89 billion).

May consumer prices rose 0.04% from a month earlier, according to the data from the TÜİK. The domestic producer price index, on the other hand, was up 0.65% month-on-month in May for an annual rise of 40.76%. 

According to unofficial data from the ENAG Inflation Research Group, an independent institution set up in 2020 to track the country’s inflation, Turkey’s annual consumer price inflation rate was far higher than official claims -- as always is the case.

ENAG said that if natural gas prices did not change in May, the monthly consumer price index increased by 7.35% whereas annual CPI increased by 109.01%. 

ENAG also calculated the CPI by applying the "zero price" method for natural gas, using the same technique as TÜİK. In that case, the CPI increased by 5.68% in May, whereas it increased by 105.45% in 12 months. 

Inflation has been stoked by a late-2021 currency crisis and it touched a 24-year peak of 85.51% in October. It eased to 43.68% by April with a favourable base effect and relatively stable lira.

Erdoğan has urged monetary stimulus over the last several years, aiming to achieve price stability by slashing borrowing costs, boosting exports and flipping chronic current account deficits to surpluses.

Erdoğan appointed Mehmet Şimşek, who is highly regarded by financial markets, as Treasury and Finance Minister at the weekend. The move was seen as setting the stage for a return to more orthodox policies, including rate hikes in coming months.

Others analysts said that after past episodes in which Erdoğan pivoted to orthodoxy only to quickly return to his rate-cutting ways, much would depend on how much independence Şimşek is granted.