Bargain Hunters in Turkey, Argentina Struggle With Inflation
Gulbin Demirel, a supermarket cashier in Istanbul, has asked her bosses to increase her monthly 1,600-lira salary ($250) to keep pace with inflation.
International investors will hope the answer is no.
But even those eager to place such bets must first determine how much they expect inflation to erode the so-called real value of their investments over time, a calculus that is both central to the exercise and notoriously difficult.
“We are very much focused on real rates for Turkey," said Anders Faergemann, a fund manager at PineBridge Investments, referring to the inflation-adjusted rate.
Much may depend on how much the likes of Ms. Demirel’s employer, French retailer Carrefour, increase wages and prices to cushion the blow of the currency devaluation or instead decide to absorb part of the higher import costs themselves—helping rein inflation in.
This year, the Turkish lira has fallen 41% and the Argentine peso is down 50%, hit by a combination of domestic troubles, the soaring dollar and concerns about trade protectionism.
Investors’ concerns were amplified by the reluctance of both countries’ central banks’ to raise interest rates earlier in the year. In June, Turkey’s central bank pushed rates up to 17.75% from 8%, in a bid to stem capital flight. But inflation in August rose to 17.9%, meaning borrowing costs are still negative in real terms.
On Thursday, the central bank is expected to hike rates again.
Last month, Argentina’s central bank pushed rates to 60% from 45%. That leaves borrowing costs after inflation at 29%.
The key question now, is whether inflation will soar in the medium term once the currencies’ declines fully feed into prices, and whether the central bank will be able to control it. Many have lost faith.
“If the market no longer believes you can bring down inflation, it doesn’t really matter where you set rates,” Mr. Faergemann added.
In the past, a weak lira in Turkey hasn’t meant the sort of price rises that the peso’s fall has in Argentina. Even as the lira lost value through much of the last decade, wage rises in Turkey hovered around 15% a year, official figures show. By contrast, Argentinian wage rises have been on an upward trend since the peso was unpegged from the dollar in 2002 and went into steep decline.
In Argentina, currency moves have tended to trigger much stronger wage demands and price increases than in other Latin American countries, research by Argentina’s Universidad Nacional de Moreno found last year. That’s because unions are stronger and make higher wage demands, while many Argentine companies—chiefly electricity providers—bill directly in dollars, said Alejandro Fiorito, one of the researchers. This wage-demand response is milder in Turkey, economists said.
In economic textbooks, inflation is often blamed on central banks increasing the money supply, high employment pushing up wages and governments spending more than they earn. Yet, over the last decade, inflation in rich countries around the globe has stayed low even as budget deficits swelled, central banks printed trillions of dollars and unemployment stayed low.
Increasingly, economists stress how businesses price their products based on costs, which are often imported. The 17% depreciation in the pound against the dollar after Britain’s 2016 vote to leave the European Union pushed U.K. inflation above 3%, from about 0.5%.
This is even starker in developing nations, where currency drops can be particularly steep.
“Currency and inflation are intertwined,” said Dariusz Kedziora, a fund manager at Aviva Investors. “Turkey ended up in this vicious circle because the authorities failed to acknowledge the correlation.”
For now, Turkish companies are trying to keep a lid on price rises. At his shop in Istanbul, Serdal Turhan sells walnuts, almonds and cashews in lira, but buys them in dollars.
The lira’s fall has pushed his business costs up some 60% this year, but he has opted for only small price increases so that he doesn’t lose his customers. His revenues have fallen by half in August alone, he said.
“In a normal year, I’d adjust prices based on the exchange rate and my total costs. But this isn’t a normal year,” he said, surveying another decline in the lira on his phone.
Current economic uncertainty will also make it more difficult for employees to demand inflation-feeding wage rises, union officials say.
“I’ll be lucky if I keep my job,” Ms. Demirel said.
She isn’t the only one feeling uncertain. Last week, $567 million left emerging-market funds, fund-tracker EPFR Global shows.
Still, there are signs of hope. If the lira’s fall isn’t outpaced by inflation, a weaker currency should bolster competitiveness abroad and boost jobs in trade-related areas, some investors say.
Lira weakness “is ultimately going to sow the seeds of an export and tourism-based revival over the next two years,” said Nick Mason, a fund manager at Invesco.
Jon Sindreu & Georgi Kantchev