The Sly Fox and inflation

Both Mehmet Şimşek and the senior management of the Central Bank have a recurring narrative: “Inflation will fall after May.”

“Sir, they have raised interest rates and implemented monetary tightening measures. They have returned from irrationality to rational policies, and due to the impact of these decisions, inflation will fall in the coming period.”

It is pure “Sly Fox” propaganda… I do not think it will fall after May, but After July and August, annual inflation will indeed fall sharply. But not because of the policies implemented by Mehmet Şimşek and the Central Bank. Rather, because of what we call the “base effect.” will fall. Before explaining why the policies they implement will not lower it, let us note how the "base effect" will occur, and expose the "sly fox" game.

When measuring annual inflation, the inflation rate of the newly arriving month is included in the calculation each year, while the month from the previous year is removed. In May 2024, when calculating 12-month inflation, the May 2024 data is included in the system, and the May 2023 data is removed. Last year, due to the Presidential and Parliamentary elections on May 14 and May 28, the exchange rate was heavily suppressed, budget expenditures increased, and fuel price hikes were postponed. After the elections ended, in the two months between June and July, gasoline prices rose by 75 percent, diesel by 88 percent, and the dollar exchange rate increased by 38 percent within two months. As a result of these price hikes that occurred in June and July, even according to TÜİK, inflation was 9.49 percent in July and 9.09 percent in August. Annual inflation, which was 38.27 percent in June, rose by 9.5 points within a month to 47 percent annually, and then increased by another 11 points in August to reach 58 percent. During those two months, ENAG inflation also climbed from 108 percent to 128 percent annually.

Now, let's see how inflation will fall starting from this coming July. According to the Central Bank's statement, TÜİK inflation will reach the 75 percent level in May or June. In other words, it will increase on a monthly basis compared to last year. But then, it is supposedly going to drop rapidly. In this scenario, let's assume June 2024 annual inflation is 75 percent, as the Central Bank says. Let's also assume that in July 2024, TÜİK measures inflation at 2 percent in line with the Central Bank's expectations. In this case, the 9.49 percent inflation will be removed from the calculation, and the 2 percent inflation will be added. In July, annual inflation will decrease by 12 points, falling from 75 percent to 63 percent. Assuming an inflation rate of 2 percent in August, annual inflation will drop to 52.5 percent. They will boast about having slashed inflation by 23 points in just two months.  

(Note: Inflation is not calculated by simple addition or subtraction; it involves multiplication and division. To subtract 9.49 percent from 75 percent annual inflation, both figures are added to 1 and then divided. 1.75 / 1.0949 = 1.5983. To add 2 percent to this number, it is multiplied by 1.02, resulting in 63 percent.) 

This decline is a base effect and has nothing to do with the economic policies being implemented. It is out of the question for the current administration and the Central Bank to lower inflation. 

WHICH SECTOR'S INCREASE IN DEMAND

As for the reasons... The policies our friends are implementing to fight inflation are not realistic. First and foremost, they cannot correctly identify the cause of inflation. According to them, the cause of inflation is the increase in demand resulting from higher-than-expected hikes in the minimum wage, administered prices (price hikes imposed by the state), and citizens using more than 25 cubic meters of natural gas during cold winter days. 

I have no objection to the inflationary effect of what they call administered prices, such as fuel hikes and similar increases. As for the inflationary effect caused by the increase in demand... The point where we diverge is which sector's increase in demand we are talking about. Mehmet Şimşek and the Central Bank they point to the increase in demand from wage earners, retirees, and households. Economists like me and those who think like me insist, "The purchasing power of the working class, retirees, and low-income groups, whose real incomes have fallen, has declined, and the physical quantity of products they purchase has also decreased. The consumption of this segment does not drive inflation. You should look at the consumption of the wealthiest 20 percent who receive the largest share of income, the consumption of those benefiting from illicit money, the consumption of refugees numbering over 10 million, and, of course, public expenditures." we say. 

WE HAVE VARIOUS CAUSES OF INFLATION

The sole reason for the inflation we are experiencing in Turkey is not excess demand. There is also a lack of supply. There is also inflation stemming from production costs, market instability, and speculative pricing. In an economy that is unstable and where trust has been lost, new investments are not being made, and supply is not being increased. Despite the rise in demand, no one is investing to increase production; instead, they are turning to imports. The supply increased through imports ultimately causes prices to rise due to exchange rates. And in my opinion, one of the most significant factors right now is the price hikes caused by opportunists.

Nothing can be measured accurately in the market. The measurement function of money had already been lost with the Turkish Lira, and since it has now been lost with the dollar as well, no price reflects reality. Prices are being set speculatively. Companies with the power to set their own prices, are fueling inflation by inflating prices. We used to call this inflation caused by opportunists. Now, the esteemed economist Mahfi Eğilmez has reminded us that this type of inflation is defined as "Greedflation" (price increases by sellers above the rate of inflation). Furthermore, as also noted by Professor Mahfi, reducing quality without increasing prices (skimpflation) or inflationary tricks such as reducing the weight of products in packaging (shrinkflation). I made a video on my YouTube channel last year. While listing the causes of inflation in Turkey, I counted exactly 19 reasons.    

They say they are raising interest rates to reduce aggregate demand. However, compared to the actual inflation being experienced, the interest rates these people have raised are still massively negative. The real inflation is at the level of 130 percent, and the interest rate you have raised is 45 percent... Is there an expectation in society that real inflation will fall below 45 percent? Furthermore, why does the top 20 percent income bracket, despite having the capacity to save, not save but instead invest their money in consumption, land, housing, automobiles, gold, and foreign currency? A person who saves does not want the purchasing power of their savings to decline; they even want to earn a little on top of it. As a result of the massively negative interest rate policies you have implemented and continue to implement, those with money have fled from the unreliable Turkish Lira, which offers no return, and have bought and continue to buy whatever they can find. This is the demand that is driving up inflation... Let's agree on this first. Of course, let's discuss the following afterwards. Your currency is unreliable. What needs to be done to make it reliable? If demand is increasing this much, why are production and new investments not increasing despite the rising demand? Why are we trying to meet the increase in demand through imports, and why do we continue to run massive foreign trade deficits?  

AUTOMOBILES WILL SOAR

Where did you make mistakes, and where do you continue to make them? I do not know if you think about these things. But if you had, you would have opened up the policies that need to be implemented to overcome these problems for discussion. You did not. You believe that you will lower inflation through the credit card spending of the poor. You cannot say a single word about the government's massive budget deficits and fiscal policies, yet you propose absurd fiscal policies like imposing an additional tax on second homes. That is why you cannot lower inflation. With nothing but fox-like cunning, you simply say that inflation will fall after next May. The annual rate of inflation may drop for a short time, but the general price level—what we define as inflation—will continue to rise. 

I have tried to explain this inflation that falls due to the base effect for so long. But there is a much simpler explanation. A car was traveling at a speed of 130 kilometers per hour. The driver finally showed some mercy, hit the brakes, and slowed down to 36 kilometers per hour. But the car did not stop, nor did it come back to pick you up. It is still moving, and you are trying to catch up to that car at your walking speed of 5 kilometers per hour. But believe me, that car's speed will not drop to 36 kilometers per hour, and even if it does, it will step on the gas again after a while like a sports car on the highway. If the Central Bank's targets are met—which they won't be; The consumer price index, which was 1859 at the beginning of the year, will rise to 2528 by the end of the year. Prices will not fall; they will continue to rise, but the pace of that increase will slow down.