The fault is not with the speculators, it is with you

Do not let the title lead you to believe that I am defending speculators. I condemn them. However, the ones responsible for the inflation and speculative price hikes we are experiencing are not the opportunists, but the government's economic policies. 

During the week, Central Bank Governor Fatih Karahan released an inflation report at a press conference. He stated that they have raised their year-end inflation expectations from 36 percent to 38 percent. There were two sections within the announcement that caught my attention. One was “Minimum Wage,” and the other was “Pricing behaviors and inflation expectations…”

The following sentence appeared in the Central Bank's report: “It is assessed that the absence of a wage update will support the disinflation process through the channel of real unit wages.”

Let us translate this difficult-to-understand sentence into plain language and convey the message they are giving: “If you do not increase the minimum wage, if real wages decline further and you tighten the worker's throat, you will be supporting our anti-inflation policy. Otherwise, if inflation does not fall, you will be the ones responsible,” there is also a slight threat, or an excuse for future failure, in this.

Many economists, including myself, have written and explained many times, both with scientific studies and statistics, that the minimum wage is not the root cause of inflation. They turned a deaf ear.

Despite hundreds of studies, each based on a scientific foundation, the Central Bank's attitude does not change. It is clear that they do not like low-income earners and workers. The monetary policies they implement already show this. From this point on, discussing Central Bank policies is not the job of economists. It is the job of labor unions, opposition parties, and the voters. There is no point in softening the blow.

Let us come to what I consider the most important aspect of the announcement. I suspect that Mehmet Şimşek and the Central Bank are unaware of what is happening in Turkey and do not realize what the root source of the problem is. 

The Central Bank Governor said the following sentence at the press conference: “We are closely monitoring pricing behaviors and inflation expectations.”  

Pricing behaviors in Turkey have, to use an idiom, gone off the rails. What needs to be done is not to monitor these speculative behaviors that constantly trigger inflation, but to identify the environment that causes them and develop monetary and fiscal policies accordingly.

Let us try to explain what is happening; perhaps they will find the “Truth.” 

Opportunistic pricing is seen during periods of high inflation. Furthermore, intermediaries, in particular, raise prices out of concern that they will not be able to replace the goods they sell at the same price. It would not be correct to call this opportunism. Similar behaviors were experienced during the World War II years, the 1978-80 period, or the first half of the 1980s. In fact, the Wealth Tax was introduced during the World War II years for the merchant class that was hoarding and making exorbitant price hikes, but because the merchant class had weight in parliament, the tax was mostly applied to non-Muslim Turkish citizens. (We were not a truly secular country back then either. How despicable and fascist a thought it is to call non-Muslim Turkish citizens “Minorities.” We are in a much worse situation now.) Anyway, let us return to our topic.  Today, there is a root problem that is much worse than in the old days, which triggers speculative pricing behaviors. 

As a result of the “Nas” (religious-based) policy implemented in Turkey, interest rates were lowered. This time, when the dollar started to rise rapidly, a nonsensical instrument called the Kur Korumalı Mevduat (KKM - FX-Protected Deposit) was invented.  The exchange rate was suppressed. Supposedly, inflation stemming from currency increases did not occur, but inflation based on abnormally low negative loan interest rates and profit explosions took off. The visible cost of the KKM disaster, which is close to 1 trillion liras (818 billion TL of which is on the back of the Central Bank), actually reached 1.6 trillion liras. The dollar was suppressed, but along with sticky inflation, a massive transfer of income and wealth occurred from the poor and middle-income segments to the wealthy segments. 

IF THERE IS INFLATION WITH THE DOLLAR…

Due to the suppressed dollar, while the inflation the dollar sees in the world is at the 3 percent level, the inflation experienced in dollar terms in Turkey, according to the consumption basket I measure myself (which goes hand-in-hand with ENAG inflation), was 53 percent in 2023. In April 2024, the annual inflation experienced with the dollar in Turkey is 32.5 percent…

What does this mean? I am ashamed to explain it to Central Bank administrators, but… Leaving aside the function of policy setting, money has three basic functions. Exchange, savings, and measurement… In our country, which has been experiencing inflation well above the world average for almost 50 years, the Turkish Lira no longer has a measurement function. Since you suppressed the dollar after the “Nas” period, the dollar no longer has a measurement function either. 

TÜİK's (Turkish Statistical Institute) inflation does not reflect the truth. By accepting this inflation as data, no one can make a forward-dated Turkish Lira contract or agreement. In the past, such contracts were indexed to the dollar or the Euro. Now, since the suppressed exchange rate also has no measurement value, everyone who has the power to set prices is pricing as they see fit. Pricing as one sees fit has reached such a point that we have become more expensive than countries whose welfare levels are many times higher than Turkey's. Two examples: A Big Mac menu in Turkey is more expensive than in the USA. According to this situation, the per capita income obtained by the Turkish person according to Purchasing Power Parity should be higher than America's.

Another example, the Greek islands… You eat at least twice the amount of seafood in the fish restaurants there compared to what you eat in ours. Fish, octopus, shrimp, calamari, and cold appetizers on the side. You drink ouzo there and rakı here. Even though you eat at least twice the amount, you pay half, or even a third, of the bill you pay in Turkey. According to this situation, we should be living in much greater prosperity than Greece according to Purchasing Power Parity. When the dollar price is wrong, and inflation is also deliberately calculated incorrectly, all macroeconomic indicators, especially national income data, turn out to be erroneous. You are stealing the income of the worker, the retiree, and the civil servant.

In an economy where the exchange rate is suppressed and there is 50 percent annual inflation in dollar terms, when the dollar also loses its measurement value, the price mechanism does not work. Even if one does not act with speculative intent, pricing towards the next level becomes institutionalized. If you add opportunistic behaviors on top of this; a lahmacun is priced between 120-600 liras depending on the neighborhood it is sold in, a bowl of tripe soup at 190-240 liras, a portion of döner at 550 liras, and a scoop of ice cream at 50-120 liras. Of course, according to our Mehmet Şimşek and the Central Bank, the ones responsible for prices increasing in this way are still the minimum wage earners…

These friends will now say this: “My dear, that “Nas” policy was irrational, we have switched to rational policies.”  

No, you have not switched to rational policies. Even if its measure has decreased, irrational policies still continue. The most monstrous application of those “Nas” policies was the low interest rate and KKM application. You raised the interest rate, but it is still not real. Inflation in the USA is 3 percent, interest is 5-5.5 percent… In our country, TÜİK's lying inflation is 70 percent, ENAG's real inflation is 124 percent, interest is 55-60 percent… It is still negative. And you still have not gotten rid of the KKM disaster, the part of the irrational policy that creates the heaviest cost, and you have not taken the slightest step to get rid of it.

As long as KKM continues, you will be forced to suppress the exchange rate. As the exchange rate is suppressed, local and foreign currencies will not be able to fulfill their measurement function. As a result, instead of the price mechanism expected to provide balance, pricing behaviors that constantly trigger inflation upwards will become institutionalized.

Yes, there are “speculators and opportunists,” but they are not the source of the problem. These manufacturers and these tradesmen did not come from space. They were the same people before the “Nas” policies emerged. Look for the problem not in the actors of the economy, but in the policies implemented by the state. Calling pricing behaviors that constantly trigger inflation upwards “speculative-opportunistic” is not understanding the essence of the problem; it is taking the easy way out. 

If you want pricing behaviors to be like those in stable markets, the first thing you should do is to get rid of the KKM disaster that forces you to suppress the exchange rate in some way. Your second task should be to declare that you disregard TÜİK inflation and to conduct a scientific study for the last 4 years of inflation in Turkey to find the truth, and to ensure that all macro indicators are interpreted according to this truth. These will not lower inflation, but they will provide the ground for the implementation of the policies necessary to fight inflation. 

INFLATION EXPECTATIONS

You wrote in the Central Bank report that “We are closely monitoring inflation expectations”… Let us remind you of the inflation expectations.

Central Bank and financial markets: 36-40 percent…

Organizations like TÜSİAD, TOBB and firms: 50-60 percent… (In reality, the pricing they do is based on 120-160 percent inflation, but they announce their inflation expectations low institutionally so that interest rates do not rise further.) 

Koç University - Konda Expectation Survey: Annual (April 2024-April 2025) 119 percent, December 31, 2024 96 percent… 

I had announced at the beginning of the year that this year-end inflation would vary between 120-140 percent, but that I would revise my estimate after seeing May and July. Of course, not TÜİK, but ENAG and the inflation I measure myself…