I have a habit that I inherited from my father: I always keep the invoices after I shop, which helps me to keep tack of the monthly, quarterly, and annual cost of living. The invoices show that the prices have suddenly risen in January, such as 20-25% increase in restaurant prices, at least 10-15% increase in food prices, at least 25% in transportation and nearly 10% increase in household goods compared to the previous month.
Obviously, these are Istanbul prices. Yesterday, Istanbul Chamber of Commerce announced the Istanbul Retail Price Index. As the Index reveals, the spending items have increased more or less at the rates I mentioned. But let me point out another danger:
The exchange rates, which have been remaining stable for a very long time, do not allow inflation to go up further in calm periods when everything is going right. That is true but when exchange rates are suppressed in a constantly stressful and tense political and financial environment, this effect, which curbs inflation, does not work. On the contrary, seller behaviour is deteriorating in a gradual way. Driven by the idea that “exchange rates will eventually rise”, sellers add a possible exchange rate increase and supply risk to the current prices. That’s why prices do not fall. They continue to surge even though the rate of increase slows down.
The government, on the other hand, believes that inflation goes up whenever exchange rates go up and it tries to eliminate the disruptive impacts of soaring inflation. It is true that, in theory and practice, exchange rate increases lead to inflation due to the “pass-through effect”. However, we should know that everything will be easier if our leaders accept that exchange rates rise when market conditions deteriorate, and therefore, actions that disrupt the market should be avoided.
This being the case, we will see that inflation will maintain its upward movement though at a declining pace, due to election uncertainty as well as other conflicts. No matter what tomorrow’s inflation figures will be, the market reality will not change. Any CPI data that is irrelevant to the real world will lead to further deterioration in pricing behaviour.
I hope that the state of permanent crisis that afflicts the country each election will end for good this time, and that decision makers will hopefully embrace a calmer and reassuring policy which trusts the market dynamics.
