Turkish Lira Plunges, Inflation Surges to 39.2%

Authored by Steve H. Hanke of the Johns Hopkins University. Follow him on Twitter @Steve_Hanke

The Grim Reaper has taken his scythe to the Turkish lira. The hapless lira has already lost 15% of its value this month. The lira’s plunge is depicted in the chart below.

With the collapse of the lira, Turkey’s inflation has surged. The most important price in an economy is the exchange rate between the local currency and the world’s reserve currency – the U.S. dollar. Changes in the exchange rate can be reliably transformed into accurate estimates of countrywide inflation rates. The economic principle of Purchasing Power Parity (PPP) allows for this transformation.

I measure the implied annual inflation rate on a daily basis by using PPP to translate changes in the TRY/USD exchange rate into an annual inflation rate. The chart below show the course of that annual rate. At present, Turkey’s annual inflation rate is 39.2%. So, my measured rate of inflation of 39.2% is 3.6 times higher than the official rate of 10.85%.