Inflation excuses

The Central Bank Governor and their deputies announced the inflation report during the week. As they do every year, they explained the excuses for why the 2025 inflation targets were not met. However, the Central Bank's excuses have begun to irritate not only the opposition but even pro-government journalists.

What is it, you ask? Gold prices have risen. Because of this rise, people's wealth has increased. With this wealth effect, these people's spending has also increased. It is said that there is around 600 billion dollars worth of gold under mattresses in Turkey.

Some of this gold may be in the hands of the poor, from weddings or as an inheritance from family. But to this day, I have not seen a middle-class or poor person who, unless they were in desperate straits, said, “The value of gold has increased, let me realize my profit. Let me sell my gold, increase my consumption, and go on vacation.” This segment sells gold when they are very desperate to pay off their debts, seek a cure for their illness, marry off their child, or buy a home with the gold they have saved for a long time. It is worth repeating: this segment has no means to save anyway. They are barely scraping by.

On the other hand, the wealthy segment has a broad portfolio distribution in their savings. A portion of this segment's savings and investments is in gold, a portion in stocks, a portion in foreign currency, and a portion in interest-bearing accounts. As a result of the large increase in gold and precious metals, their portfolios and wealth have increased significantly. Whether the portion of the increased wealth that is liquidated is gold, interest-bearing deposits, or stock sales is unknown. But what I do know, and what I have been telling Mehmet Şimşek and the Central Bank team from the beginning, is this:

Your diagnosis is wrong. You cannot lower inflation by strangling the low-income earners and further reducing their already declining purchasing power. The demand that fuels inflation in Turkey is the demand of the top 20 percent of the population... By giving them high real interest rates, you are both increasing their spending and increasing their wealth. The interest income they earn is added to their deposits at the end of the period, which increases the money supply and, in addition to the increase in demand, also has an inflationary effect. To fight inflation, there is a need for fiscal policies more than monetary policies, and for the rule of law, a reliable and stable environment to increase supply and investments.

Another excuse for inflation... Extreme increases in food prices due to drought, frost, and climate conditions... What kind of climate is this that only affects Turkey and a few other inflation-victim countries? Another excuse is the increase in energy prices...

Below, I am sharing two graphs posted by economist İnan Mutlu on his X account. The first shows food prices in the world and in Turkey during the 2-year and 7-month period from June 2023, when Mehmet Şimşek became Minister of Treasury and Finance, to today. (Source: Food and Agriculture Organization of the UN (FAO) and TUIK)

In the world, food prices went from 100 to 100.7 over 2 years and 7 months. They did not even increase by 1 percent. In Turkey, however, they skyrocketed from 100 to 262.5, an increase of 162.5 percent. What kind of climate effect is this?

Again, in the 2-year and 7-month period since Mehmet Şimşek and the Central Bank team took office, crude oil prices in the world have fallen from 100 units to 87. In Turkey, gasoline prices have risen from 100 units to 233.7 units. An increase of 133.7 percent. You have collected taxes from the people hand over fist because we sell fuel. Moreover, during this period, foreign exchange rates have increased at a rate below inflation.

The excuses in the Central Bank's latest inflation report have infuriated even pro-government journalists. However, they pleased the actors of our money market and stock traders. The stock market rose after these statements. They welcomed the Central Bank Governor's statements with satisfaction. Moreover, they seemed to have forgotten the "İmamoğlu slap" they received in the financial markets last year. The architect of the İmamoğlu operation has become the Minister of Justice. It is clear that the politicization of the judiciary and the risks this will cause in the economy will increase even further. But the markets did not care.

The appointment of someone who is an admirer of İskilipli Atıf—who was an enemy of the War of Independence and Atatürk and was executed for treason—to the Ministry of Interior did not interest our market players much either. Most likely, the hot money investors who suck the blood of Turkey might even be pleased with the new Minister of Interior. Because the new Minister of Interior, who is also an admirer of Abdülhamit, published a congratulatory message for the 148th anniversary of Sultan Abdülhamit's accession to the throne while he was the Governor of Erzurum. The expression in the message he published is exactly as follows:

“By establishing the Public Debt Administration (Duyunu Umumiye), he eased the state's debt burden…”

Someone who praises the Public Debt Administration will, of course, please those who love foreign hot money (carry trade).

In the pro-government press, it is said that Mehmet Şimşek's seat is getting hot. However, in the money markets, especially among hot money investors (carry trade), it is commented that he remains in his seat so as not to cause panic. You never know, our new Minister of Interior might just jump to the Ministry of Finance.

Jokes aside... This inflation will not fall. I would also like to remind the money market actors. They were caught up in the spring air blown by the Central Bank, but the reality is this:

There is a high probability that the new Minister of Justice will carry out politically motivated operations. We paid a very heavy price for this economically after March 19 last year, and we continue to pay it. Real interest rates in Turkey are hovering 10 points above where they should be. As a result, interest payments in the budget are ballooning. Interest payments, which were 1 trillion 270 billion liras in 2024, increased by 62 percent in 2025 as a result of the İmamoğlu operation due to interest rates being approximately 10 points higher, reaching 2 trillion 54 billion liras. The public sector's debt stock is growing day by day due to both reckless budget expenditures and high interest rates. (While it was 9 trillion 250 billion liras in 2024, it reached 13 trillion 65 billion liras at the end of 2025.)

An interest payment of 2 trillion 742 billion liras was targeted for 2026. However, it is highly likely that interest payments will increase due to political risks. Just in the first month of this year, January, it was 453 billion 700 million liras. We paid more than 10 billion dollars in interest in just the first month.

With the İmamoğlu operation, we wrote in 12 Punto on March 23, 2025, in the article titled "The Price of Ambition," that interest rates would remain high in real terms, right in the first week. We estimated that it would have a cost to the economy of between approximately 90-120 billion dollars. CHP staff say this cost is 150 billion dollars. Unfortunately, the predictions of economists like us came true. The interest burden paid by the state, or rather by the people through their taxes, is increasing. The interest burden of the real sector is increasing. Industrial production is stagnant, and despite starvation wages, the textile and ready-to-wear industry is experiencing a major collapse. Employment is decreasing.

Our money market economists do not care much, but with this debt structure and fiscal policy based on enriching cronies, inflation will not fall. One should also not ignore the political-legal risks created by the recent ministerial appointments.