In economic theory, “Fisher” and “Cambridge” equations tell us whether or not there will be inflation when governments print money or inject liquidity into markets. But either of these expected outcomes may not always happen. Even if it does sometimes, it may affect somewhere else.
The reason why I chose to lean on this topic today because people have been asking me the following question for some time now: “May the Fed and central banks of other countries increasing liquidity cause inflation?” To respond to this question, we better look back into history.
There were times in history when nations were struck by post-pandemic hyperinflation. Ancient Roman records show that annual inflation during the Antonine Plague was around 15.000%. Roman citizens were banned from increasing the price of their products and the penalty for violating this law was death. When the State started running out of money, soldiers in the Roman army were paid with salt instead. Their monthly wage was called “salarium”. This Latin root eventually made it into the English as the word “salary”.
Sadly, great pandemics and plagues throughout the human history offered some great opportunities to the opportunists. However, there’s no record showing that the Spanish Flu of 1918-1921 caused hyperinflation neither in Europe nor in Ottoman Empire.
Let me remind you of the fact that commodity prices were showing a downward trend even before the virus outbreak began. The agricultural commodity prices were about to hit bottom. While the price of some commodities such as Corn, Soy and Cotton have been going down, Milk and Food of Animal Origin have been in decline as well. And you know what’s going on with Oil Prices. There’s no reason for prices to show a drastically upward trend in any country that operates in Global Markets, under the circumstances.
I actually don’t expect the excessive liquidity which will be injected into markets by the Fed through its open-ended commitment to asset purchase will cause any inflation; because, it’s just not possible for liquidity to turn into some huge investment and consumption demand considering Americans’ declining trust in government. In short, there’s no data indicating that inflation will rise amid virus fears.
Also, given the fact that some companies will have to cut their prices against declining demand, it seems quite unlikely that inflation will rise in the short-term. But, this doesn’t mean that we will not suffer from high cost of living.
“People actually affected by high cost of living, not CPI…”
Before the emergence of the novel coronavirus, I have mentioned many times that the gap between cost of living and inflation is growing both in the EU and Turkey. Normally, all of the goods and services listed in CPI are not used by everybody. We only use, consume or affected by a maximum of 20-25 goods/services out of 400 items in the CPI. Obviously, we need to meet our basic needs first such as buying food, beverages, cleaning supplies, paying tuition fees, our rent, heating, electricity, communication bills, and spending money on health, and gas. If government’s control mechanisms can effectively work, I don’t think there will be any price increases. Well, I can’t exactly make a spot-on comment now since restaurants and stores are all closed.
So, it seems like there are only two factors that may cause inflation to rise under these circumstances:
- Prices of some goods and services in Turkey may sharply rise due to virus-related supply and delivery problems. High demand vis-à-vis low supply would eventually cause prices to go up. As the deterioration in Turkish agricultural products market has been going on for a while now, the government must first try to maintain balance in agricultural products and food market. Meanwhile, the production of import-dependent goods seems to have stopped as well because of the virus outbreak, which would unavoidably result in price increases.
- Sometimes, government may turn a blind eye to the fact that certain persons or groups have dominance over the production and marketing of vital goods and services. But, if government loses control over these people, then inflation and high cost of living would be inevitable.
In short, I don’t expect prices to increase so drastically that they will cause people to suffer financially. So, in my estimation, inflation in March would be around 0.7% or less. As for the year-end inflation, I don’t think it will hit single-digits yet. Besides, expectations were all shaped around 10% even before the coronavirus attack. Therefore, I can easily say that inflation will not hit 8.2% as expected by CBRT. But, I don’t expect it to go off the rails either, at least now when we are still dealing with the coronavirus.
In conclusion, there is no apparent reason that might cause inflation to begin behaving in an uncontrolled way, and no trend either that might lead to huge demand even if the government prints a lot of money. Here’s my answer to those wondering about the future. Right now, we are trying to stop this nightmare. We’ll see what happens in the future.
As I have mentioned in my latest book “Exit from Economics”, our biggest issue is moral decay. If those who are responsible for supplying vital goods and services blindly forget moral duties and values and start offering them at unmerciful prices, this old debate dating back to Ancient Greece will ignite again: “If price” means how much something actually costs, what determines the monetary value of a good? Is it the labour poured into manufacturing it or its rarity? Or the sales skills of the sales rep…?”
