Services Inflation and the Exchange Rate in Türkiye

Inflation in Türkiye has been high since 2021. This paper investigates the sources of this inflation and the impact of mitigating exchange rate volatility. Two main findings emerge. First, there has been a significant divergence in inflation dynamics across CPI components since late 2021—in particular, services inflation has exhibited more inertia than goods inflation, a result that stands out in both historical and cross-country contexts. The persistence in services inflation has been generally broad-based, with rental services playing an important role. Second, exchange rate shocks are estimated to have a smaller impact on services inflation than on goods inflation. The peak services inflation response to a nominal exchange rate shock is estimated to be fairly muted, at just one-tenth the size of the shock. Indeed, since mid-2023, there has been an unusually sharp rise in the relative price of services, as goods inflation has been more sensitive to exchange rate movements. These findings suggest that when inflation persistence—especially in services—is relatively high, inflation stabilization may require complementary policies to break inertia beyond a stable currency.