Turkey's inflation rose 11.9 percent in October compared to the same month of 2016 — its biggest spike in 9 years, while core prices — without volatile items such as food and energy  rose 11.8 percent — the biggest rise since January 2004, state agency Turkstat reported on Friday.

The news undermines President Tayyip Erdogan's desire to use cheaper credit to sustain economic growth, despite that fact that the current spike in inflation is in the main a product of a government-sponsored credit boom.

Erdogan's legitimacy, such as it is, is based on a combination of nationalist rhetoric and a strongly growing economy. Economic growth therefore in effect buys time among its main recipients, the growing urban middle class, from whom Erdogan can perhaps expect least support and which is starting to articulate political demands of its own.

The consumer price index (CPI) was up 2.08 percent compared to the previous month, driven higher by rising prices for clothing and household goods, Turkstat said. A weaker lira and higher energy costs weighed on prices.

Annually, transportation costs were up 16.79 percent and food prices increased by 12.74 percent. The central bank raised its inflation outlook for 2017 to 9.8 percent this week, up from 8.7 percent, pointing to the slide in the lira and rising energy costs.

Growth decelerating

Turkey is expected to miss official growth forecasts this year and 2019. In its medium-term program, updated annually, the government sees growth at 5.5 percent between 2018 and 2020.

Growth in 2017 is estimated at 5.0 percent, below the government's official forecast of 5.5 percent. But for 2018, growth is seen at 3.5 percent. Erdogan has said "no one should be surprised" if Turkey's year-end economic growth hits 7 percent, but not many are now holding their breath on this.

Balance of payments

Higher inflation also impedes the goal of lowering public borrowing costs and will not help in Turkey's other main problem of how to cut a balance of payments deficit of about 4.5 percent of GDP, far wider than most other large emerging economies.

No yield buffer 

There has long been an expectation for the central bank to lower the cost of lending on the back of an expected deceleration in inflation in 2018. Recent falls in inflation have given emerging markets everywhere a yield buffer against volatility caused by domestic political unrest or rising yields in the West; everywhere that is except for Turkey.

But the yield on Turkey's two-year lira notes rose 17 basis points to 13.21 percent on Friday, its highest since April 2009, according to Bloomberg. That means barely positive real yields, something that is painfully clear when volatility hits — and in Turkey that could be any time. Real yields in emerging markets are around 3 percent by comparison and US, eurozone and Japanese yields at zero, a 300-point spread between emerging and developed 10-year 'real' yields is the widest in a decade.

Interest rates

Friday's data came two days after central bank governor, Murat Cetinkaya, warned of a two-month "inflation blackspot" through November. The central bank's next rate decision is on December 14. Cetinkaya said this week that the bank's monetary stance was tight enough to meet the bank's official long-term target of 5-percent inflation. 

jbh/hg (dpa, Reuters)