CBRT Warns: Disinflation Loses Momentum as Prices Stay Sticky

Turkey’s Central Bank (CBRT) has released a detailed inflation analysis showing that the pace of disinflation remains slower than desired, largely due to persistently high service inflation. The study, published on the bank’s official blog Merkezin Güncesi, takes a close look at why service prices continue to rise more stubbornly than goods prices and why this trend poses a structural challenge for price stability.

According to the analysis, service inflation is significantly more persistent than goods inflation, a pattern that has become increasingly evident in recent years. Local, non-tradable services such as urban transportation stand out in particular. Even when prices rise sharply, demand for these services often continues, giving providers considerable pricing power. This dynamic weakens competitive pressure and makes price increases harder to reverse, slowing the overall disinflation process.

Service Inflation Under the Microscope

The report, titled “A Closer Look at 2025 Service Prices: What Do Sub-Items Tell Us?”, was prepared by Assistant Economist Aysu Çelgin and Senior Economist Fethi Öğünç from the TCMB’s Research and Monetary Policy Department. It notes that consumer inflation ended 2025 at 30.9%, while goods inflation stood at 25% and service inflation surged to 44%, highlighting a sharp divergence within the inflation basket.

An examination of price indices at the five-digit level reveals that 19 of the top 30 items with the largest price increases in 2025 were in the service sector. Within services, three categories were particularly influential: education, rents, and local services with limited competition. These areas emerged as the main drivers behind the persistence of high service inflation.

Education Prices Lead the Way

Education services recorded the strongest price increases among all service categories in 2025. Looking at a longer-term comparison, consumer prices overall have risen nearly eightfold since the end of 2019, while education prices have increased tenfold over the same period. University tuition fees were especially notable, rising 15.1 times, making them the fourth-highest increasing sub-item in the entire consumer price index.

The analysis attributes much of this surge to indexation mechanisms based on past inflation. Until recently, the Private Education Institutions Regulation allowed fee increases to be calculated using 12-month average consumer and producer price inflation, effectively embedding the impact of the previous 24 months. This structure meant that inflation shocks continued to influence prices long after their initial impact had faded.

A regulatory change introduced on September 5, 2025, shifted the framework toward using current-year-end inflation, reflecting only the most recent 12 months. As the report explains, under the old system, unexpected economic shocks affected prices over a longer period, and when inflation began to slow, prices remained tied to historically high inflation. The TCMB describes the new regulation as a step that weakens indexation and supports the disinflation process, while keeping the following quote unchanged:

“This feature increased the pricing power of service providers and caused service inflation to be more persistent compared to goods inflation.”

Rent Inflation Remains a Structural Challenge

Rent inflation is another major source of persistence. The analysis points to multiple factors, including earthquakes, urban transformation, demographic pressures, rent caps, and lease renewals that are typically indexed to past inflation. Together, these elements create inertia that slows the response of rent inflation to tighter monetary policy.

The TCMB notes that monetary policy affects the housing market with a lag, while supply-side measures only show results in the medium to long term. As a result, rent inflation may continue to diverge from other service categories for some time, even as its underlying trend gradually eases.

Local and Low-Competition Services Drive Pricing Power

Beyond education and rent, the report highlights local services with limited competition—including barbers and hairdressers, domestic cleaning services, veterinary care, dry cleaning, shoe repair, and urban transportation. These services share common traits: they are labor-intensive and often subject to administrative or semi-administrative pricing decisions.

In many cases, prices directly determine the service provider’s income. As the analysis explains, maintaining purchasing power, along with personal income expectations and inflation perceptions, plays a major role in pricing behavior. This makes downward price adjustments particularly difficult once inflation expectations become entrenched.

Inflation Contribution Still Elevated

The combined contribution of education, rent, and local services to consumer inflation peaked at 11.3 percentage points in May–June 2024. By the end of 2025, this contribution had declined to 7.8 points, but the TCMB stresses that it remains elevated. Individually, rents contributed 4.2 points, education 1.5 points, and local services 2.1 points. Together, these categories account for nearly one-quarter of total consumer inflation.

Persistent Risks to Disinflation

In conclusion, the Central Bank emphasizes that service inflation remains a key risk to the disinflation process. While recent regulatory changes in education pricing are seen as supportive and rent inflation shows signs of moderation, ongoing price increases in urban transport and other local services reflect deep-seated structural rigidities. These factors continue to slow the pace of sustainable inflation decline in Turkey.