Turkey’s middle class put on austere footing amid soaring prices

Soaring inflation in Turkey, fueled by steep price rises earlier this year, is dealing hard blows not only to low-income groups but also to the middle class, as consumer demand has contracted the last days.

Inflation in 2022 is expected to significantly exceed the 36% of last year, which was the highest rate during the 19-year rule of President Recep Tayyip Erdogan’s Justice and Development Party (AKP). Turkish consumers started the new year in the middle a wave of further price increases on raw materials and services such as electricity, natural gas and transport. Therefore, monthly inflation should reaches about 15% in January, exceeding the rate of 13.5% in December. Double-digit rates are also expected in February and March.

The Turkish army of unemployed, including 3.8 million who continue to look for work and more than 4 million who have given up, are the first affected by the impact. The minimum wage has been increased by 50% for 4,250 Turkish liras ($307) last month, raising hopes of a relative shield against inflation for the half of the working population earning the minimum. Yet rising wages are likely to lose relevance by the end of March, leaving them again with real income eroding.

Earners earning more than the minimum wage and small independent contractors in rural and urban areas – that is, generally the middle class – are also not immune. Their standard of living changes suddenly, with soaring prices forcing a review of consumption habits.

The ability of relatively high-income earners to obtain salary increases in line with inflation depends very much on their organizational strength. Public sector employees benefit inflation compensation, but in the private sector, union members with the right to collective bargaining represent only a small minority, representing no more than 3 percent of all employees. The others seem to have to suffer real income losses. And those of the independent middle classes, whether farmers in rural areas or entrepreneurs in urban centers, are struggling to stay on their feet. Caught between soaring costs and high borrowing rates, they are among the hardest hit.

Skyrocketing price increases have forced the middle class to cut spending. Car prices, for example, soared around 50% last year and are expected to rise further, forcing many people to abandon plans to purchase new vehicles. Even the use of existing cars is becoming a luxury after recent increases in fuel prices and tolls. Istanbul’s characteristic traffic congestion has suddenly eased since the beginning of the year. “People can no longer use their cars because of rising gas prices. The traffic density in Istanbul has decreased over the past week,” Murat Ongun, the spokesperson for the Istanbul Metropolitan Municipality, tweeted on January 7.

The daily spending habits of the middle class are also changing. Reports indicate that declines in restaurant and drinking establishment sales have worsened after the latest price hikes as fewer people choose to eat out or meet for drinks.

The government raised special consumption tax on alcoholic beverages and tobacco by 47% on January 3, resulting in price increases of up to 33%. Taxes are now four-fifths of the price of a pack of cigarettes worth 25 lira ($1.80), three-quarters of the price of a 700-milliliter bottle of raki, the national flavored alcohol of local anise, worth 255 lire ($18.40). ), and two-thirds the price of half a liter of beer sold for about 35 liras ($2.50) in drinking establishments. Spirits taxes have long drawn additional anger as they are widely seen as a tool to deter alcohol consumption as part of the AKP’s efforts to impose its Islamic worldview. As a result, many liquor and tobacco stores and food and drink establishments are struggling to stay afloat.

The dramatic depreciation of the Turkish lira, which lost nearly 44% of its value against the dollar last year, has also dampened the appetite of the middle class for overseas travel, compounding the impact of the COVID-19 pandemic. Foreign travel expenses rose to just over $3 billion last year after plunging to $1 billion in 2020 when the coronavirus hit, but remained well below $4.5 billion in 2018. The spread rapid onset of the highly contagious omicron variant also threatens to slow down domestic tourism.

Faced with the risk of hyperinflation, demand for loans from the middle class has also declined. Although the value of consumer loans increased by 20% at current prices last year, it should be interpreted as a decline of around 16% in real terms, taking into account annual inflation of 36%. Home and auto loans – the most popular with the middle class – have fallen significantly in real terms.

Also in the retail sector, many businesses have seen their sales plummet since the start of the year, according to reports, including clothing stores despite the advent of the sales season.

A sharp contraction in consumer demand, sucking in the middle class, could lead to sharp economic stagnation, especially in the second quarter of the year, meaning another wave of job losses could be looming.

About Veronica Richards

Check Also

Report shows rising business prices amid soaring US inflation

As household budgets reel under the impact of soaring prices for fuel, food, rent and …