Why Does Inflation Remain Persistent In Turkey?

By Çağrı Emre Mermi

Inflation is defined as a sustained increase in the general price level, reflecting the erosion of purchasing power. Modern macroeconomic theory categorizes inflation into demand-pull, cost-push, and expectations-driven forms. Especially in emerging markets, inflation is shaped not only by cyclical factors but also by institutional quality, policy credibility, exchange-rate pass-through, and fiscal-monetary coordination. Turkey’s experience mirrors this broader framework. After chronic high inflation episodes in the 1970s–1990s, the post-2001 stabilization program—founded on inflation targeting, banking reform, fiscal consolidation and increased central bank independence—reduced inflation from over 30% to 6.2% in 2012. However, beginning in 2013, inflation dynamics reversed. By 2021–2023, Turkey recorded one of the highest inflation rates among G20 and OECD economies. Persistent inflation in Turkey is therefore not the result of a single macroeconomic imbalance. Rather, it arises from the interaction of monetary expansion, unconventional interest-rate policies, fiscal pressures, exchange-rate volatility, tax-driven cost increases, and the political-economy structure governing economic decision-making.

Monetary Expansion and Money Supply Dynamics

The monetarist tradition posits that “inflation is always and everywhere a monetary phenomenon.” While modern literature acknowledges that money supply alone does not determine inflation, empirical studies show that rapid liquidity growth—especially when accompanied by low interest rates—contributes to inflation inertia in emerging markets. Turkey has experienced substantial growth in M2 money supply since 2015. Research by Kara (2022) and Kalemli-Ozcan (2023) demonstrates that periods of accelerated monetary expansion in Turkey have strengthened demand-pull pressures and amplified exchange-rate pass-through. In economies with high import dependence like Turkey, this effect is particularly pronounced.

Interest Rate Policy and the Real Interest Rate Channel

The policy interest rate is the primary tool of inflation targeting. Between 2021 and mid-2023, Turkey adopted a heterodox approach by lowering policy rates despite rising inflation. This produced deeply negative real interest rates, which strengthened credit growth, fuelled consumption, and unanchored inflation expectations. International evidence suggests that credibility losses in monetary policy weaken transmission channels, making inflation more persistent and costly to reduce. The Turkish case is now widely cited as an example where political intervention in interest-rate decisions undermined disinflation capacity.

Fiscal Policy, Public Expenditures, and Inflation

Fiscal dominance—when monetary policy is constrained by government financing needs—creates inflationary pressures. Studies on Turkey (Alper & Üçer, 2019; IMF, 2022) show that rapid increases in public expenditures, particularly during election cycles and crisis periods, elevate aggregate demand and weaken monetary tightening. Moreover, the expansion of quasi-fiscal mechanisms (KKM, energy subsidies, administered prices) has increased the inflationary burden by shaping expectations and placing implicit pressure on the central bank to maintain accommodative policies.

Exchange-Rate Pass-Through and Imported Inflation

Turkey’s production structure is highly import-dependent, especially in energy and intermediate goods. Extensive research confirms that Turkey has one of the highest exchange-rate pass-through coefficients among emerging markets. TL depreciation therefore transmits rapidly into domestic inflation through:

• rising input costs,

• higher energy prices,

• transportation cost increases,

• cascading second-round effects.

Exchange-rate volatility since 2018—intensified after 2021—has thus been a dominant determinant of inflation persistence.

Indirect Taxes and Administered Prices

Increases in VAT, excise duties, and administered price adjustments introduce both one-off inflation shocks and second-round effects. Because fuel, natural gas, tobacco, and transportation are highly sensitive sectors, tax adjustments spread throughout the entire price system. Empirical studies for Turkey (Bülbül & İsmihan, 2021; Celasun, 2022) show that indirect tax hikes meaningfully contribute to annual CPI increases.

Political Economy Factors and Institutional Constraints

Institutional economics highlights the role of governance, policy credibility, and central bank independence in inflation outcomes. In advanced economies, political actors set macroeconomic goals, while independent technocratic bodies execute policy. Literature on Turkey’s recent period emphasizes:

• erosion of central bank autonomy,

• discretionary and frequent policy shifts,

• politicization of monetary decisions,

• weakening of rule-based frameworks.

These dynamics raised uncertainty, unanchored expectations, and reduced policy effectiveness—factors now accepted as core contributors to inflation persistence.

Inflation in Turkey remains elevated due to a confluence of structural, monetary, fiscal, and institutional forces. Rapid money supply growth, prolonged negative real interest rates, expansionary fiscal practices, significant exchange-rate pass-through, indirect tax adjustments, and political-economy constraints collectively shape inflation dynamics. While global shocks exacerbated domestic fragilities, the primary drivers of persistence are internal policy inconsistencies and institutional weakening. Sustainable disinflation requires a return to rule-based policymaking, restored central bank independence, credible communication, fiscal discipline, and structural reforms aimed at reducing import dependency and improving institutional quality. Without such reforms, inflation is likely to remain volatile and significantly above target in the medium term.

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