Analysis from the Central Bank of the Republic of Turkey (CBRT): How do oil prices affect inflation?

Economists at the Central Bank of the Republic of Turkey (CBRT) analyzed the potential impact of rising international crude oil prices on the Turkish economy in a blog post. The assessment stated that a $10 increase in Brent crude prices could raise inflation by 1.6 percentage points by the end of the year.

The blog post titled "Reflections of International Oil Prices on Consumer Prices and the Current Account Balance" written by CBRT Senior Economist Okan Eren, Economist M. Koray Kalafatçılar, Chief Advisor Eren Ocakverdi and Assistant Economist Orhun Özel was published on the Center's Journal page.

The article included the following evaluations:

Due to recent rising geopolitical tensions, the impact of crude oil prices on national economies has once again become a hot topic. Brent crude oil prices, which had fallen to as low as US$60 per barrel at the beginning of May, rose rapidly following these developments, approaching US$80. While international prices have declined again since the easing of tensions, they appear to have settled at a higher level compared to the previous period. The magnitude of the price increase, coupled with the potential for supply disruptions, necessitates a reassessment of the potential impact of crude oil prices. In this blog post, we quantify the estimated impact of potential increases in crude oil prices on inflation and the current account balance, particularly in the Turkish economy.

Crude oil prices exhibit high volatility due to both supply and demand developments. Recent history reveals that crude oil prices can often deviate significantly from their annual averages. For example, Brent crude oil prices, which were around US$70 at the beginning of 2022, rose rapidly due to geopolitical developments, reaching US$128 in March 2022. In the following period, prices fell to US$80, averaging US$99 for the year.

How do oil prices affect inflation?

For Turkey, a net importer of crude oil, developments in international crude oil prices carry significant macroeconomic implications. In this context, the current account balance and inflation are paramount. Indeed, increases in crude oil prices directly impact consumer inflation through fuel. Because fuel is a basic input, indirect increases can also be observed in transportation costs and transportation service prices. Crude oil also provides an input for many products, such as bottled gas, packaging, and chemicals. Furthermore, an increase in oil prices indirectly impacts inflation through channels such as the backward indexation behavior that rising inflation may create, and exchange rate pressures stemming from inflation expectations and deterioration in the current account balance.

We estimate a Bayesian Vector Autoregression (VAR) model to measure the impact of crude oil prices on headline inflation. Our findings indicate that a 10 percent increase in crude oil prices ultimately increases consumer inflation by 1 percentage point. Approximately half of the total impact occurs in the first quarter, while the impact is approximately 0.8 percentage points after one year.

The Inflation Report published in May assumed that the price of Brent crude oil would reach US$62 in June 2025. A simple calculation can explain the implications of the elasticities outlined above for inflationary pressures generated by current developments in Brent crude oil prices. To this end, we project a scenario of an average increase of US$10 in Brent crude oil prices in July, or approximately 16 percent. Under such a scenario, our annual inflation forecast for the end of 2025 would rise by 1.2 percentage points, combined with direct and indirect effects, resulting in a total increase of 1.6 percentage points at the end of the year.

The impact of rising prices on the current account balance

Crude oil prices directly affect the current account balance through energy imports and exports. To calculate this effect, we assume that the price elasticity of exports and imports is zero and that the increase in oil prices will directly impact foreign trade figures. In this case, we calculate the 12-month net impact of crude oil prices on the current account deficit as an increase of approximately US$2.6 billion for every US$10 increase. Indeed, an average US$10 increase in crude oil prices is projected to increase petroleum product imports by US$5.1 billion and exports by US$2.2 billion. Therefore, a significant portion of the increase in imports caused by the increase in crude oil prices is offset by exports. Furthermore, when calculating the net impact on the current account deficit, we also consider the impact of these increases on foreign trade adjustment items defined in the balance of payments and net transportation revenues (a US$0.3 billion increase and a similar decrease in the current account deficit). Under the same scenario, there is an upside risk of USD 1.2 billion on the 2025 current account deficit over the last two quarters.

Volatility in oil prices increases macroeconomic risk

In summary, crude oil prices are highly volatile and can fluctuate sharply throughout the year. Developments in recent weeks have confirmed this. Developments that lead to sharp increases in crude oil prices, to the extent they become permanent, can have negative effects on key macroeconomic indicators. Our calculations, assuming a $10 increase in the price of a barrel of Brent crude, indicate that the impact on key macroeconomic variables is manageable.

In recent years, the weight of fuel in the consumer basket has been declining. Its share, which was 4.9 percent in 2022, has fallen to 3.3 percent in 2025. Furthermore, the lump-sum tax levied on fuel products limits the pass-through from crude oil prices to domestic product prices.

Our sample period covers the period after 2011. Our model includes global growth, Brent oil prices, import unit value index, basket exchange rate, credit, output gap, and headline inflation. All variables except output gap and credit are entered into the model as quarterly logarithmic differences. Additionally, a variable measuring the effects of minimum wage and moderated prices and taxes is added exogenously. We included four lags in the model. The global growth indicator is an export-weighted series. Credit is adjusted for exchange rate effects and realized; after standardization, the series is averaged over 13 weeks. The output gap is the simple average of eight different indicators produced by the Central Bank of the Republic of Turkey (CBRT). The credit and output gap series are stationary by definition.

"The increase in oil prices does not affect import and export volumes."

The price elasticity of crude oil import and export demand is limited. In other words, even with significant increases in oil prices, import and export volumes do not decline significantly.

We do not take into account the indirect effects of the increase in oil prices on the current account deficit through domestic and foreign demand in our calculations.

Considering the interaction of the oil price shock with geopolitical developments, exchange rates could experience more significant pressure than anticipated in this article. In such a case, the exchange rate shock would also need to be included in the analysis.