Again…about the inflation…

My latest post on social media received both positive and negative reaction from my followers. As far as I understood, the problem of inflation is evaluated or viewed by many based on either knowledge or “learned helplessness”. So, I told them that,

“…in a world to be soon dominated by AI and digitalization, a majority of people is still holding on to a 100-150 year old economics book like it was a remedy for every problem. You know what this looks like? It’s like when we look at clouds and see faces or inanimate objects. Beware of those who are trying to justify, even rationalize their foolish beliefs…” I know many people got upset by my warning. But I am not taking it back.

Let’s take a look at the real reason behind high inflation. First of all, Turkey is struggling with severe cost inflation. There is a major global rise in all commodities, including oil, and to top it off, exchange rates in Turkey continue to climb up at full pace. So, the inevitable outcome is the increase in producer prices.

This upward trend, however, doesn’t exactly impact the consumer prices. On the other hand, the fact that there has been a huge rise in goods and services purchased by consumers, irrelevant of seasonality, doesn’t go unnoticed either. During my lectures to different sectors in different locations, I have once said, “No fruit is smaller than its own core. Therefore, ever-increasing core inflation will prevent CPI from going down in the future”. And that is exactly what happened. From agricultural products to cleaning supplies, prices are on the rise.

“Avoid getting used to it…”

The real danger, however, is getting used to high interest rates and high inflation as each phenomenon would soon turn into a chronical disease. Because, once the downward spiral of inflation-devaluation-interest rate kicks off, there may be no coming back.

But, can “interest rate hikes” be a remedy for this problem? No, they cannot since interest rates are a part of the spiral I mentioned above. The only thing we can do is to comprehend the dynamics of goods and services market and realize that the rises occurring in this market are not only caused by exchange rate movements, but also by maturity structure, debt-receivables relationship and risk premiums. Besides, we are aware that certain institutions are trying to turn the market into a bilateral monopoly as well as we are aware that chain supermarkets are taking advantage of the situation to set longer maturity dates while they are collecting cash from the consumers. In short, producers of goods and services are sadly enslaved by buyers.

If CBRT continues to hike rates, big buyers will become stronger than ever but the producers, on the other hand, will become weaker and weaker. We will never be able to avoid chronic inflation unless we solve this problem once and for all.

For the last two days, I have put the same facts into different words. I hope my explanation was clear enough. The most difficult challenges are still ahead. I will be further writing on those issues starting tomorrow.