Is Turkey on the brink of hyperinflation?

Is Turkey on the brink of hyperinflation?

Turkey has thrown caution to the wind as the rest of the world frets about surging inflation. The country’s central bank cut its main interest rate for the third consecutive month to 15 per cent in November, despite the nation’s consumer price index rising 19.9 per cent year on year in October.

On Friday, annual inflation is expected to cross the 20 per cent threshold to hit 20.7 per cent, according to a Reuters poll. That would represent its highest rate since November 2018, when the country was reeling from a currency crisis.

Turks have been watching with horror while enduring a repeat of that episode in recent weeks, with the lira tumbling 28 per cent against the dollar since the start of November. Analysts warn that, if President Recep Tayyip Erdogan refuses to abandon his fixation with low interest rates, Turkey could be headed towards hyperinflation. The country is heavily reliant on imports and other raw materials that are becoming increasingly expensive as the lira slides.

“Headline CPI will likely close in on 30 per cent [year on year] over the coming months,” wrote Phoenix Kalen, analyst at the French bank Société Générale, in a recent note.

“Headline CPI peaking at 27 per cent over the near term would be an optimistic scenario,” added Kalen. Laura Pitel

Will US job numbers increase the pressure on Powell to raise rates?

Traders will be watching the US jobs report on Friday closely, as questions mount about the future direction of monetary policy at the world’s largest economy.

In early November, Federal Reserve chair Jay Powell urged patience on interest rate rises as the US central bank said it would start unwinding its $120bn-a-month pandemic-era asset purchasing programme.

Powell said it was “time to taper” because the economy had achieved “substantial” progress towards the central bank’s two targets of full employment and inflation averaging 2 per cent. But, he added, there was “still ground to cover to reach maximum employment”.

Recent data now point to signs of a tightening labour market, with new applications for US unemployment benefits falling to their lowest level since 1969.

A big jobs print could add to expectations of a rise in borrowing costs. US employers added 531,000 positions in October and Andrew Hunter, senior US economist at Capital Economics, expects “a solid 500,000 in November”.

“But the growing risk of a winter Covid wave and a dwindling supply of available workers look set to weigh on employment growth” soon after, warned Hunter.

Meanwhile, the core personal consumption expenditure index — the Fed’s preferred measure of inflation — rose 4.1 per cent in October, its biggest year-on-year jump since the 1990s and higher than the 3.7 per cent annual rise recorded for September.

This has left the Fed with a tricky balancing act going into next year, said Brian Nick, chief investment strategist at Nuveen.

Unlikely to raise interest rates while the US economy is still recovering from the pandemic, investors will soon find out “just how tolerant the Fed has allowed itself to become of higher inflation”, Nick said.

“If ‘transitory’ was this year’s buzzword, next year’s will be ‘full employment’,” predicts Nick. George Steer

Will eurozone inflation reach highest point since the common currency was introduced?

Eurozone inflation for November is expected to have climbed at its fastest pace in 30 years on Tuesday. Such a rise would match a similar record reached last month in the US, as both economies face surging energy costs, strong consumer demand and supply chain disruptions.

Economists polled by Reuters forecast annual eurozone headline inflation to hit 4.4 per cent in November. This would mark an increase from 4.1 per cent in October, and would be more than double the European Central Bank’s target of price stability at 2 per cent.

It would also signify the highest rate recorded since the euro came into existence in 1999, and the fastest pace since 1991.

Core inflation, which excludes energy and unprocessed food, is expected to rise to 2.3 per cent, the swiftest rate in more than a decade.

“Headline inflation is set to remain high throughout the fourth quarter,” said Melanie Debono, economist at Pantheon Macroeconomics, “with transitory factors currently supporting the headline rate, such as higher energy prices, pent-up demand in services and supply side disruptions, that could prove more lasting than policymakers anticipate.”

In line with the consensus, Debono has recently lifted her inflation forecasts for the eurozone but thinks that “markets are wrong on ECB tightening in 2022”.

At its October meeting, there was a broad consensus at the ECB governing council that there were “no signs as of yet” of a pass-through from higher energy prices to wages, according to minutes published on Thursday.

This means low underlying price pressure in the medium term while the new Covid-19 variant will perhaps add further downward risk to the eurozone economic and inflation outlook. Valentina Romei

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