The annual inflation rate in Türkiye slowed for a seventh straight month in May and fell under 40% for the first time in 16 months, official data showed Monday, driven by a temporary government measure offering free gas to households, offsetting price rises in other goods.
Consumer prices rose by 39.6% from a year ago, the Turkish Statistical Institute (TurkStat) data showed. It compared to 43.7% registered in April and marks a significant regress from the peak of over 85% in autumn 2022, before it started to ease as of November.
The statistical authority last week said it would apply a "zero price" method for natural gas in the consumer price index (CPI) calculations for May, a month in which President Recep Tayyip Erdoğan won reelection, extending his governance into a third decade.
The government had pledged ahead of last month's elections that it would provide free gas in May, and a monthly free 25 cubic meters until May 2024. The move is seen costing the government TL 40 billion ($1.89 billion).
Erdoğan, starting a third term in office, has stressed the government's determination to safeguard households against high prices and said tackling inflation is a top priority.
His view was echoed by the newly appointed Vice President Cevdet Yılmaz, an orthodox economic manager who said Monday that the government would prioritize the fight against inflation, adding that they were "aware it will take time."
Month-over-month, consumer prices rose 0.04% in May, the TurkStat data showed.
The domestic producer price index was up 0.65% month-over-month for an annual rise of 40.76%.
Clothing and shoe prices recorded the largest monthly increase with 9.85%, followed by restaurant and hotel prices with 7.10%.
Housing prices, which include natural gas, dropped 13.79% on a monthly basis, and were the only group to record a decline last month, lowering the overall monthly reading by 2.09 percentage points.
The weight of natural gas in the inflation basket is 2.9%.
Core "C" inflation, which excludes energy, food, beverages and tobacco prices, rose 4.25% month-over-month, for an annual rise of 46.62%, up from 45.48% in April.
The government has urged monetary stimulus over the last several years, aiming to achieve price stability by slashing borrowing costs, boosting exports and flipping chronic current account deficits to surpluses.
In what analysts say could signal a departure from economic policies centered around low-interest rates, Erdoğan on Saturday named Mehmet Şimşek, who is highly regarded by financial markets, as treasury and finance minister.
Şimşek, 56, won the markets' confidence during terms as finance minister and deputy prime minister between 2009 and 2018. He said on Sunday the country has no choice but to return to "rational ground" in terms of economic policies.
Şimşek and Yılmaz's appointments "may pave the way for the realization of key moves for the solution of short-term problems and the transition to a strong economy, along with Orthodox policies, for the coming period," said Enver Erkan, a chief economist at Dinamik Yatırım.
Şimşek stressed the importance of lowering inflation to single digits, increasing predictability and accelerating the structural transformation.
"Establishing fiscal discipline and ensuring price stability for sustainable high growth will be our main goals," he said.
Fiscal policies and structural reforms will support Türkiye's central bank to help lower inflation, he noted.
In line with the government's approach, the Central Bank of the Republic of Türkiye (CBRT) has aggressively reduced interest rates to ease borrowing costs for businesses and individuals and encourage spending.
The policy rate, known as the one-week repo rate, was cut from 19% in mid-2021 to 9% by early 2023.
The monetary authority last cut the benchmark policy rate by another 50 basis points to provide stimulus after the catastrophic Feb. 6 earthquakes that struck the southeastern region, killed more than 50,000 people and caused extensive destruction across 11 provinces.
According to Erkan, the latest remarks signaled that the interest rate policy "will be used as the main tool together with Mr. Şimşek's orthodox policy rhetoric and a significant tightening will be made."
Erkan said the tightening in credits would reduce consumption, and since consumption-based imports would decrease, a periodical current account surplus would be given with a periodic economic slowdown.
"To prevent commercial life from being adversely affected by monetary tightening, targeted incentives can be applied by separating consumer and commercial loans," he noted.