Sticky inflation is here and it will not fall to the targeted level

On Friday, the Central Bank Governor, along with his deputies, released an inflation report and raised their year-end 2025 inflation target from 21 percent to 24 percent. Of course, they have their excuses: rents, rigidity in services inflation, increases in unprocessed food products, and Administered and Directed Prices... (The Turkish translation of the term 'Administered and Directed Prices' is: price hikes implemented by the state, and the 44 percent Revaluation Rate applied by the government instead of its own future inflation expectations.)

The response given by Central Bank Deputy Governor Cevdet Akçay to economists who argue that there is sticky inflation in Turkey, delivered in a harsh and irritable tone, left its mark on the meeting. Akçay's response to a question regarding the view that there is an inflation stickiness of around 30 percent was: "How do they know there is sticky inflation, on what basis do they say inflation will get stuck at the 30 percent level? These are all superstitions."

As one of the many economists who has been writing and explaining on television since the beginning of 2022 that inflation in Turkey has become sticky, let me explain "how I know and on what basis I am saying this."

HOW DO WE KNOW ABOUT STICKY INFLATION?

An economist's job is to make forecasts by looking at what is happening in the country and the world. While there are sub-methods, forecasting is based on two foundations. One: you build a mathematical model. Two: you look at the political-economic preferences, behavioral patterns, and expectations of the influential actors and factors in the subject you are forecasting.

First of all, I must remind you of this: fighting inflation cannot be done with monetary policy alone. It must also be supported by fiscal policies. The Central Bank already states this view. But it does not explain what fiscal policies should be. On the contrary, it never mentions the potential of the government's fiscal policies to exacerbate inflation rather than help reduce it. I cannot expect them to talk about this and criticize the President anyway. But when the question "How do you know" comes in a scolding tone, we earn the right to ask, "Then why don't you clearly explain what needs to be done in fiscal policy?"

The government's budget policy is clear... It is clear that they do not care about savings in expenditures... The ostentatious spending is clear... The budget deficits are clear. The budget expenditure items are clear...

I am looking at the expenditures to be made for Treasury-guaranteed highways, bridges, airports, and city hospitals, which are the black holes in the budget.

I am looking at the 2.2 trillion lira in taxes that are being wiped out upfront under the guise of so-called investment incentives, which serve to enrich cronies and have no effectiveness. (The tax expenditure amount is 3 trillion this year. 800 billion is the minimum wage, the rest is taxes that have been waived.)

You are hopeful in the inflation report by saying that the ratio of the budget deficit to national income will fall. We have been saying for years that these forecasts have not held and will not hold. The issue is not just the ratio of the budget deficit to national income. In addition to the budget deficit, I am looking at the interest payments in the budget and the debt structure of the public sector. In 2025, there will be a 2 trillion lira deficit in the budget and just as much in interest payments. Furthermore, there is no sign that interest payments will fall in the short term. On the contrary, they will increase even more. For example, I am looking at the public sector domestic debt stock. On January 27, 2025, our colleague Alaattin Aktaş wrote in the Ekonomim newspaper. I am quoting a few data points from Aktaş's article, which he prepared using data from the Ministry of Treasury and Finance website.

135 BILLION DOLLARS IN ADDITIONAL INTEREST BURDEN HAS STUCK OVER THE LAST 4 YEARS

Against a principal debt of 5 trillion TL, 6.6 trillion in interest debt has accumulated. 57 percent of the total 11.6 trillion lira debt is interest... For every 100 liras of principal debt, 136 liras of interest burden has accumulated. By the end of this year, this balance will deteriorate even further with budget deficits. Do you not think that even the 135 billion dollars in additional interest burden that has been placed on the shoulders of this nation and the budget over the last four years, which will be paid in the coming period, is a cause of sticky inflation in itself?

Both while fueling inflation and while fighting it, you have narrowed the purchasing power of low-income earners with the policies you implemented. You claimed that you would reduce inflation by lowering their demand, but you transferred what you took from this segment, which does not actually cause inflation, to a handful of people with high purchasing power whose demand cannot be curbed. No decline is observed in the demand increase of this segment. Look, you say imports are falling. True, but the imports of consumer goods by the high-income group are not falling; on the contrary, they are increasing. Here is the TUIK data for you... In 2024, total imports fell by 5 percent, while consumer goods imports increased by 14.3 percent. My dear, whose demand are you fighting against?

You said that increases in the minimum wage and pensions fuel inflation. You pressured for policies that squeeze people's throats, and you prevented low-income earners from accessing food and healthcare. You transferred wealth to the upper-income group and further increased both their interest income and their consumption expenditures.

NO INCREASE IN PRODUCTION ON THE HORIZON

When we say that inflation has become sticky, we also look at this: in addition to monetary and fiscal policies, production policies, especially in agriculture, must be added. There is no planning in the economy and production. There are no incentives or policies aimed at increasing production in the real sector and agriculture. In the real sector, there are only incentives aimed at favoring cronies and enriching cronies. We have written and explained on television many times that inflation expectations made without taking these into account are invalid.

The latest TUIK data... While 93.4 percent of the population in Turkey resides in city and district centers, the rate of those living in towns and villages has fallen to 6.6 percent. In addition to this decline, the average age of those working in agriculture has risen to 58. The population that will engage in agriculture is eroding. The government's agricultural policy is not planned agricultural production and supporting the farmer. It is to import agricultural products through friends and acquaintances and enrich them. When we look at this, we say that food product inflation has become sticky. Perhaps you have heard. Agricultural product prices are falling globally. I draw your attention to the fact that I did not say agricultural product inflation is falling; prices are falling in absolute terms. You live so disconnected from people and from Turkey that I felt the need to remind you that Turkey is not a desert country.

Among my convictions that inflation is sticky and that you will not be able to meet the inflation target is this: For a long time, the Central Bank and Mehmet Şimşek have said that regarding minimum wage, pensions, and salary increases, one should look at future inflation, not past inflation. You curbed the increases in the minimum wage and pensions. While increasing the minimum wage by 30 percent, the President applied the Revaluation Rate at 44 percent based on past inflation. Yet, he could have halved it and applied 22 percent.

NO TARGET HAS EVER BEEN MET...

There is a trust issue in the fight against inflation. There is the issue of breaking the public's inflation expectations. Central Bank Governor Fatih Karahan frequently emphasizes the importance of breaking inflation expectations. But unfortunately, you cannot break these expectations. Because the Central Bank's inflation forecasts have never been accurate to date. Far from being accurate, they haven't even come close.

It started the 2022 inflation target at 11.8 percent and finished at 63.3 percent.

It started the 2023 inflation target at 22.3 percent and finished at 64.8 percent.

It started the 2024 inflation target at 33 percent and finished at 44.4 percent.

It started the 2025 inflation target at 17.5 percent, changed the target to 21 percent, and in the very first month, raised the target to 24 percent.

Immediately after the Central Bank's statements, we evaluated it on Friday on 12 Punto while it was still fresh. If we look at the government's fiscal and economic policies, the year-end expected inflation will not fall to the 24 percent targeted by the Central Bank or the 29 percent set as the upper limit. Now is the time to discuss the 30 percent wage increases for workers and the laughable increases in pensions again...

Of course, I must add this. All of this is based on TUIK's unconvincing inflation data. For example, while TUIK said 64 percent in 2023, ENAG found 127 percent. In 2024, while TUIK said 44 percent, ENAG calculated 83 percent. I don't know what TUIK will announce at the end of this year, but my current year-end forecast for ENAG is around 60 percent.

As a justification for inflation not falling, they previously pointed to the minimum wage and pensioners. Then they started using rent and unprocessed food products as excuses. Now they have added healthcare prices to their excuses.

I have one more claim. Let's say inflation is 24 percent this year, and 12 percent next year, as targeted by the Central Bank... I will go even further, let's say inflation becomes zero... They have distorted income distribution so much and brought the general price level to such a point that the hunger problem, housing problem, and health problem in Turkey will not even be alleviated, let alone solved... The price level in food and health has ceased to be a technical economic problem and has become a matter of "the nation's survival." I will write the details of this next week.