While the worry for many investors was Turkey's foreign currency reserves versus the $180bn in external debt coming due -- around $100bn from banks and $65bn from corporations, according to the Council on Foreign Relations -- one economist had another concern: under-reported inflation.
Professor Steve Hanke, in an article published in Forbes last week, estimated Turkey's annual inflation rate at 39.2 per cent following the depreciation, far above April's official consumer price index print of 10.85 per cent.
Here's his reasoning:
"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 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...At present, Turkey's annual inflation rate is 39.2 per cent. So, my measured rate of inflation is 3.6 times higher than the official rate of 10.85 per cent."
Professor Hanke suggests interest rates will have to be raised to north of 40 per cent.
