In late 2023, the Turkish lira faced severe downward pressure, having depreciated by nearly 35% against the US dollar over the preceding 12 months. This depreciation has depleted the central bank's net foreign reserves and intensified a balance of payments strain. By October 2023, annual inflation was officially reported to be over 60%, though some independent research groups (such as ENAG) estimated the true inflation rate to be in excess of 120%.
While the central bank eventually shifted towards monetary tightening by raising its policy interest rate, critics argued that this response was delayed, allowing inflation expectations to become deeply unanchored. In an attempt to protect low-income households, the government implemented steep increases in the minimum wage and placed temporary price caps on essential grocery items and rent increases.
However, business leaders warn that these measures are unsustainable. The massive minimum wage hikes have triggered a classic wage-price spiral, with firms immediately raising prices to maintain profit margins. This has severely eroded the international competitiveness of Turkey's manufacturing sector. Furthermore, the combination of high domestic inflation and price caps has led to supply-chain bottlenecks and widespread hoarding of goods.
Discuss the costs to the Turkish economy of an inflation rate "officially reported to be over 60%" (with independent estimates "in excess of 120%"). (Extract D)
