© Reuters. FILE PHOTO: Women shop at a local market in the Fatih district of Istanbul, Turkey, January 13, 2021. REUTERS / Murad Sezer

ISTANBUL (Reuters) – Turkey’s annual inflation jumped much more than expected to 36.08% year-on-year in December, the highest since September 2002, with data released on Monday reflecting a drop in the value of the pound to the end of last year.

On a month-to-month basis, consumer prices rose 13.58%, the Turkish Statistical Institute said, against a Reuters poll forecast of 9%. The annual inflation forecast was 30.6%.

The pound was trading at 13.6 against the dollar after the data, 3% lower on the day but off a low of 13.92. It lost 44% of its value last year after volatile November and December.

The producer price index rose 19.08% month-on-month in December to an annual increase of 79.89%, according to the data, reflecting the surge in import prices due to the currency crash.

This was the highest annual CPI since 37.0% in September 2002, before President Tayyip Erdogan’s AK party came to power in November of the same year. The forecasts of 13 economists ranged between 26.4% and 37.3%.

Consumer prices were pushed up by transportation prices, which climbed 53.66% year-on-year, while heavily weighted food and drink prices jumped 43.8%.

“This reflects a vicious cycle of demand-driven inflation, which is very dangerous because the central bank had suggested that the pressure on prices was due to supply constraints and that there was nothing they could do about it.” said Ozlem Derici Sengul, founding partner of Spinn Consulting, in Istanbul.

“The rates should be immediately and aggressively increased,” she said. “Annual inflation will likely hit 40-50% by March.”

Inflation has been around 20% in recent months, driven by the pound’s drop to record lows after the central bank cut its policy rate by 500 basis points since September, under pressure from Erdogan .

The central bank said temporary factors were pushing prices higher and predicted inflation would follow a volatile course in the near term.

The pound hit a record low of 18.4 against the dollar in December before rebounding sharply last week after state-backed market interventions and after Erdogan announced a program to protect deposits from the pound against currency volatility.

Inflation has been predominantly in double digits and well above emerging markets for most of the past five years, chipping away at Turkish earnings and sapping public support for Erdogan.

The central bank’s forecast for year-end inflation was 18.4% in a report released at the end of October.

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