Inflation Expectations Fall, Prof. Demiralp Says the Drop Reflects a “Slowing Economy”

Koç University’s October Household Inflation Expectations Survey shows a surprising decline in inflation forecasts — not because of growing trust in the central bank, but due to an economic slowdown, according to Prof. Dr. Selva Demiralp.

Inflation Expectations Ease to 53%

Koç University’s latest Household Inflation Expectations Survey revealed that the 12-month ahead inflation forecast dropped from 58% in September to 53% in October.

The year-end expectation stood at 60%, while households reported a “felt inflation” rate of 68% for the past 12 months.

This marks the continuation of a downward trend that began in April, suggesting that inflation expectations among Turkish households are gradually softening.

“The Downward Trend Is Strong”

Commenting on the data in a live interview with Bloomberg HT, Koç University Professor Selva Demiralp said the fall in expectations was somewhat unexpected given the latest inflation figures.

“Headline inflation came in strong this month, and we were wondering whether the downward trend in expectations would break,” she said. “But, quite unexpectedly, we saw that the trend is continuing strongly.”

Why Are Expectations Falling While Prices Rise?

Demiralp explained that the decline in expectations despite high monthly inflation could stem from two possible causes.

The first is related to the Central Bank’s credibility:

“If the public has strong confidence in the central bank and believes monetary policy will lower inflation, that faith can pull expectations down,” she said.

However, Demiralp was cautious about this interpretation:

“I don’t think our central bank currently has enough credibility to bring expectations down this sharply,” she added.

“The Economy Is Clearly Slowing”

The second explanation, according to Demiralp, is the visible slowdown in economic activity.

“Growth was reported at around 1.6%, but consumption had slowed quarter-on-quarter, and government spending had also declined,” she noted. “The only increase was seen in investments, which mostly reflected inventory buildup.”

Drawing on her field observations, Demiralp said households sense the slowdown:

“People feel that the economy is cooling and that demand is weakening, so they adjust their pricing behavior accordingly, thinking prices won’t rise as fast.”

“Underground Economy May Be Inflating Growth Figures”

Demiralp also referenced Central Bank Governor Fatih Karahan’s recent international presentations, suggesting that the seemingly strong growth figures might be overstated due to the formalization of the shadow economy.

“Karahan hinted that part of the high growth rate may come from unregistered activity being absorbed into the official economy — implying that real growth might not be as strong as it appears,” she said.

She further suggested that the Turkish Statistical Institute (TÜİK) may revise its second-quarter GDP data later on:

“Given the recent data, I wouldn’t be surprised if TÜİK revises those figures downward in the next update.”

Survey Results Show Broad-Based Decline

The analysis also shows that even the same respondents reported lower expectations month-to-month. Among participants who took part in both September and October, average expectations fell from 60% to 55%.

“This can be viewed as a robustness check,” said Demiralp. “It’s a sign of a genuine, widespread softening in expectations.”

Koç University’s official report echoed this assessment:

“The survey results indicate that the downward trend in household inflation expectations observed since April continued into October.”

The October survey covered 2,435 respondents, of which 58% had also participated the previous month, further strengthening the validity of the findings.

Bottom Line

While the fall in inflation expectations could be seen as good news, experts caution that it doesn’t reflect renewed faith in monetary policy.

Instead, it likely signals a cooling economy, weaker demand, and growing fatigue among consumers and businesses.
For policymakers, the message is clear: unless economic confidence and institutional credibility improve, lower expectations may not translate into sustainable disinflation.