Are workers and retirees with declining purchasing power causing inflation?

The diagnosis made by Minister of Finance Mehmet Şimşek and Central Bank Governor Hafize Gaye Erkan is far from the truth.

ARE WORKERS AND RETIREES WITH DECLINING PURCHASING POWER CAUSING INFLATION?

Meriç KÖYATASI

Turkey has been in the grip of high inflation for years. For the last two years, we have been experiencing inflation that has brutally increased poverty for the vast majority of society. About two years ago, the inflation rate reported by TÜİK, which no one believes, was 19 percent, and the Central Bank's policy rate was also at the 19 percent level.

Inflation in the US had soared to 8 percent, and central banks all over the world had begun raising interest rates to combat inflation. Two years ago in the autumn, President Erdoğan said, “I am an economist. Interest is the cause, inflation is the result, and there is a religious decree (NAS), interest rates must be lowered.” While the whole world was raising interest rates, we started lowering them. Both the exchange rate and inflation exploded.

From September 2012 to September 2023, our two-year cumulative inflation was 196 percent according to TÜİK and 559 percent according to ENAG. In two years, the income of low-income earners, retirees, workers, civil servants, and farmers did not increase by this much. Small tradespeople, who set their own prices, could not replace the goods they sold; their profit margins fell.

THE MIDDLE CLASS HAS COMPLETELY DISAPPEARED

During these two years, a massive transfer of income and wealth took place in society. The middle class, which was already weakened, has completely disappeared. Today, in economic terms, it is impossible to speak of the existence of a middle class in Turkey. In the income distribution classification made by TÜİK according to 20 percent population segments, 80 percent of the population has an income below the poverty line announced by Türk-İş. 80 percent of the population is poor. Nearly half of this 80 percent lives below the hunger threshold.

During this severe impoverishment process, elections were held and Erdoğan became President again.

The economic policies implemented were not just policies that fueled inflation. At the same time, we have an economic structure that constantly runs a current account deficit and has become dependent on foreign debt. When fresh foreign currency does not come from outside, the wheels of the economy will stop. After the election, it was said that the irrational policies implemented for the last two years would be abandoned, and former Minister of Treasury and Finance Mehmet Şimşek returned to office. Hafize Gaye Erkan, who is not a central banker but has a successful career in fund management in the US, was brought to the head of the Central Bank. The expectation from this duo was primarily to find new external resources to turn the wheels of the economy and to reduce inflation.

For newcomers, a period is usually granted, saying, “Let’s wait and see what they will do.” Usually, this period is 3 months. I was a bit hasty; I started explaining that they would not be successful without waiting for the three-month period. Let’s leave the issue of why foreign money does not come for another article. First of all, why can they not be successful in the fight against inflation?

The diagnoses of both Mehmet Şimşek and Hafize Gaye Erkan regarding the causes of inflation are completely wrong. When the diagnosis is wrong, the treatment cannot be right, of course.

Both in the statement made by Central Bank Governor Gaye Hanım at her first press conference and in the tweets and statements frequently made by Mehmet Şimşek, they emphasized that the state's hikes in fuel products and taxes would have an effect, but they pointed to the raises given to workers, civil servants, and retirees as the primary cause of inflation.

I just shared the inflation rates of the last two years. The incomes of civil servants, workers, and retirees did not increase by even half of these rates in two years.

According to TÜİK’s national income account, labor's share of national income fell from 30 percent to 25 percent. According to the ISO 500 survey, which provides higher wages than average wages, the share of labor in national income in the 500 largest industrial firms, which was 44 percent in 2020, fell to 27 percent at the end of 2022, while the share of profit rose from 30 percent to 54 percent.

Apart from TÜİK and ENAG, I have also prepared a separate inflation basket since January 2022 and have been measuring inflation for the last 21 months.

After including the minimum wage hikes and the raises made to worker retiree pensions from the beginning of 2022 to today, the inflation experienced has destroyed the purchasing power of this segment so much that... In the last 21 months, the retiree's purchasing power has fallen by 62 percent. Currently, they can only buy 32 units of the 100 units of goods and services they bought at the beginning of 2022, despite the pension increases (no raise was given to retirees in July).

The same situation applies to the minimum wage. A minimum wage earner who bought 100 units of goods and services at the beginning of 2022 can only buy 46 of them at the end of the 21 months that have passed, despite the increases made to their wages. They no longer have the power to buy 54 percent of the products they consume.

Let’s also look at the three-month period that Mehmet Şimşek and Gaye Erkan have been in office... During this period, the minimum wage was increased from 8,500 liras to 11,400 liras. The purchasing power of the minimum wage earner has fallen to 9,114 liras according to TÜİK (a loss of 2,286 liras), to 8,732 liras according to ENAG (a loss of 2,670 liras), and to 8,300 liras according to my inflation (3,100 liras) in the last three months. They did not give a raise to retirees. The retiree’s 7,500 lira pension has fallen to 5,000 liras today according to TÜİK, to 3,840 liras according to ENAG, and to 3,676 liras according to my inflation. The purchasing power of the civil servant salary, which was at least 22,000 liras in July, has come down to 17,500 liras according to TÜİK and 16,800 liras according to ENAG.

HOW CAN WORKERS AND CIVIL SERVANTS CAUSE INFLATION?

In this case, I ask Mehmet Şimşek and Gaye Erkan. No matter which inflation calculation you look at—TÜİK, ENAG, or my inflation basket—the purchasing power of workers, retirees, and civil servants has significantly declined. These segments have become impoverished. How can inflation increase due to the demand of a segment whose purchasing power is constantly falling and whose actual consumption amount is decreasing? While the purchasing power of this segment is falling and they are buying fewer goods and services every month compared to the previous month, how can workers, civil servants, and retirees cause inflation?

Let us also remind this duo of one more thing. You look at national income statistics, but I wonder what you see. The economy grew by 3.8 percent in the second quarter of the year. When viewed from the expenditure side, household spending with 15.6 percent and import growth of 20.3 percent have been the engine of growth. In recent years, household spending is seen as the cause of growth, but there is also a decline in industrial investments. Investments have fallen by 2.6 percent. The increasing consumption demand has been met by imports. Moreover, despite the low-interest environment and increasing consumption, investment is not increasing; imports are increasing. This shows how sick and unreliable the economy is. While the purchasing power of workers, civil servants, retirees, and farmers is falling every day, whose consumption is this that triggers the increase in national income? If you really intend to fight inflation, you have to find the answer to this question.

As a result of the wrong interest rate and exchange rate suppression policies implemented, the high-income segment with money (approximately 20 percent of the population) has stopped saving. Even if they did not need to, they increased their consumption of housing, land, automobiles, and durable consumer goods to avoid being affected by rising inflation.

The demand of the refugees, whose numbers reach 15 million and whom you refuse to see, who do not participate in production (or participate with very little cheap labor), has increased consumption.

There are as many refugees in Turkey as there are retirees, and they receive aid from the state. The state cuts the retiree’s money and transfers it to the refugees. You do not see the demand here.

There is another consumption group you do not want to see. Turkey has been placed on the Grey List by the OECD Financial Action Task Force. It has become a country where terrorism and drug financing are provided and black money is laundered. Again, according to many international institutions, Turkey is a country where many illegal organizations, gangs, and the mafia, especially international drug traffickers, run rampant...

Unidentified capital inflows in the Central Bank's Net Errors and Omissions item are breaking record after record. From the closest to the furthest circle of those who run these businesses, there is a segment that reaches high income very easily and spends recklessly. If you look at the demand side of the economy from this side a little, you will hit the mark. Of course, the root cause of inflation is the budget deficits caused by state expenditures and the money printed to cover budget deficits. The Treasury-guaranteed tenders that cause budget deficits, the money transferred to pro-government contractors, the payments made to KKM (FX-protected deposit) holders... If you deal with these a little, you will get closer to finding the real cause of inflation. Take your hands off the throats of retirees, workers, civil servants, and low-income earners.