Inflation in Turkey fell sharply in December.

However, with the value of 64.3 percent published by the statistical office, it remains high in an international comparison.

In November, the cost of living rose by 84.5 percent year-on-year.

The costs for rent and living as well as for groceries, which are decisive for many consumers, nevertheless still rose above average by 80 and 78 percent respectively.

Andreas Mihm

Business correspondent for Austria, Central and Eastern Europe and Turkey based in Vienna.

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The decline in December is explained by the international drop in energy costs, but also by a statistical effect: from November to December 2021, the rate shot up by 15 points to 36 percent, thereby raising the basis of the comparative measurement in December 2022.

Against this background, economic experts surveyed by the Bloomberg agency expect inflation to be 44 percent by the end of the year.

That would still be more than three times the average of the 15 comparator countries in Europe, the Middle East and Africa observed by the agency.

The restrained rise in food, energy and producer prices points to a "visible downward trend" that will enable the government to meet its economic program targets in the medium term, said Treasury and Finance Minister Nureddin Nebati.

The official inflation target of the central bank controlled by the government in Ankara is still 5 percent.

Government policy fuels inflation

However, economists are skeptical about how strong the decline will continue in the coming period.

In view of the high inflation and the upcoming elections in the middle of the year, the government has once again raised the minimum wage by more than 50 percent, decided on other socio-political benefits and announced billions of euros in credit relief in order to strengthen people's purchasing power.

In combination with the continued policy of cheap money, this should in turn result in rising prices.

On a monthly basis, inflation rose 1.2 percent in December, less than half the previous month's rate of 2.9 percent.

The still high increase of 98 percent in producer prices has also weakened noticeably compared to 136 percent in the previous month.

The producer prices are considered an indicator for the future development of consumer prices, as producers try to pass their costs on to consumers.

Turkey's longstanding high inflation is being driven by several factors.

The weak national currency, the lira, continues to drive up prices, as it makes goods imported into Turkey more expensive.

The lira depreciated 29 percent against the dollar last year.

Added to this are high energy prices and ongoing problems in the international supply chains, which make many primary products more expensive.

In addition, at the behest of President Recep Tayyip Erdogan, the Turkish central bank has continuously lowered interest rates, most recently to 9 percent, which, according to current data, still amounts to negative interest rates of 55 percent.

This, in turn, is one reason for the boom in the real estate and stock markets, where prices in lira had tripled in the past year.

The devaluation pressure on the lira was mitigated by dollar inflows in the tens of billions from friendly states such as Russia and the Arab world and by government-subsidized exchange programs for foreign exchange in lira.

At the turn of the year, the central bank announced that it would continue this “liraisation” of the economy, and wanted to increase the proportion of lira investments in accounts from the current 53 percent to 60 percent.

Exports are booming, imports even more so

While large sections of the population are suffering from inflation, the export industry is booming.

It benefits from Erdogan's "cost what it wants" policy of boosting the export of goods as a driver of economic growth.

In 2022, it reached a new record value of $254.2 billion, as Erdogan said at the beginning of the week.

That is an increase of 12.9 percent over the previous year.

Turkey should become one of the ten top export countries in the world, said Erdogan.

Exports to the EU, by far the most important partner region, were expanded by 12 percent.

The chemical industry replaced the automotive industry at the top of exporters in 2022.

Last year, Germany was the most important partner country for Turkish exports with 21 billion dollars.

The USA followed with 16 billion dollars, followed by Iraq, Great Britain and Italy.

Since the Russian invasion of Ukraine and the delivery bans imposed by the West, exports to Russia have played a rapidly growing role.

In December, Russia was already the third export destination with a goods value of $1.3 billion, behind Germany ($1.8 billion) and America ($1.4 billion).

Western governments have repeatedly warned Ankara against circumventing delivery bans.

Among the countries of origin for Turkish imports, Russia has long played the largest role as an energy supplier, including last year ahead of China, Germany and the USA.

According to data from the Ministry of Commerce, Turkey's trade deficit increased by 138.4 percent to $110 billion in 2022 because of the 34.3 percent increase in import bills to $364 billion.

Despite major efforts to expand exports, their import coverage fell from 83 percent to almost 70 percent.