Under pressure: Turkey’s inflation and cost-of-living crisis

Turkey is grappling with entrenched inflation and a deepening cost-of-living crisis, placing mounting pressure on households and businesses.

While the Central Bank of the Republic of Turkey (CBRT) has taken dramatic steps to stabilise the economy, ongoing political turbulence is undermining efforts to bring about a sustainable recovery.

Official data showed that as of March 2025, Turkey’s annual inflation rate eased to 38 percent, down from a peak of 75 percent in May 2024.

Until recently, the CBRT adhered to a gradual easing cycle. However, the political crisis triggered by the arrest of Istanbul Mayor Ekrem İmamoğlu in March 2025 forced a sharp reversal in policy.

In April 2025, the CBRT implemented a rate hike to stabilise financial markets and prevent a further collapse of the Turkish lira, raising the main policy rate to 46 percent.

This sudden tightening was not a result of regular macroeconomic planning but a direct reaction to the escalating political risk premium which now dominates investment decisions and exchange rate dynamics.

In addition to monetary tightening, the CBRT undertook extraordinary foreign currency interventions to defend the lira.

Following İmamoğlu’s arrest the central bank sold over $50 billion in foreign currency reserves in a matter of weeks to stabilise the national currency, which had plunged to a record low of 42 lira per US dollar.

This unprecedented scale of intervention highlights both the severe pressure on the lira and the unsustainable cost of trying to shield the currency amid deepening political instability.

Due to its production and trade structure the Turkish economy is particularly vulnerable to currency shocks. A large proportion of the nation’s intermediate goods, energy supplies and capital equipment is imported, ramping up the exchange rate pass-through effect.

Many families now spend more than half their income on rent, forcing some to relocate

The depreciation of the Turkish lira rapidly increases production costs, which are then passed onto consumers in the form of higher prices. This dynamic magnifies inflationary pressures and makes price stability heavily dependent on exchange rate management.

Adding to the challenge, confidence in the Turkish lira is at an all-time low. Households and businesses, distrustful of the currency’s stability, are insatiably thirsty for foreign currencies, primarily the US dollar, euro and gold. This persistent dollarisation pressure exacerbates lira weakness and severely limits the effectiveness of domestic monetary policy tools.

According to the CBRT’s April Expectations Survey, households anticipate a 12-month inflation rate of 59 percent, while real sector businesses expect 42 percent and market participants project 26 percent.

When households expect high inflation, their behaviour reinforces it through advance purchasing, dollarisation and a reluctance to save in local currency. This dynamic adds to the CBRT’s difficulties in taming price growth.

Household impact

The high inflation environment has significantly squeezed purchasing power, directly causing a decline in living standards. The minimum wage, set at TL22,104 (approximately $620) as of January 2025, struggles to keep pace with rising costs.

Essential expenses such as food, housing and utilities have seen substantial price hikes, disproportionately affecting low and middle-income households.

What’s more, surging inflation has widened wealth inequality. Middle-class families report cutting back on education, healthcare and leisure spending, while low-income households struggle to meet basic needs.

Among the most acute challenges facing Turkish households is food inflation. According to the Turkish Statistical Institute, food prices rose by over 70 percent year-on-year as of March 2025. 

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Staples such as bread, dairy products, fruits and vegetables have seen dramatic price hikes. Farmers face high input costs, particularly for fertiliser and fuel, which feed into consumer prices.

The housing market is also a source of pressure. Rents have soared, especially in major cities like Istanbul, Ankara and Izmir, with average annual rent increases exceeding 100 percent in some districts. 

Many families now spend more than half their income on rent, forcing some to relocate to cheaper, often lower-quality neighbourhoods further from city centres.

Policy debates and the road ahead

The debate over the crisis has intensified as inflation bites. Yet one reality permeates all policy discussions: no economic stabilisation plan can succeed without resolving political uncertainty.

For now the CBRT’s stance is clear: rates will remain high until inflation expectations and actual inflation decline materially.

However monetary tightening will only offer temporary relief unless political risk is controlled.

Turkey’s inflation and cost-of-living crisis is fundamentally a political crisis with financial consequences.

Until trust in institutions is rebuilt, political stability restored and independent governance re-established, inflationary pressures, currency instability and economic hardship are unlikely to dissipate.

As Turkey attempts to navigate this difficult period the stakes are extraordinarily high for the country’s economic stability, societal cohesion and sustainable prosperity.

Arda Tunca is an economist and financial adviser based in Bodrum, Turkey