Inflation, Wage Increases, and Taxes..
After the high cost of living figure announced by Istanbul Chamber of Commerce earlier this month, everyone’s gaze was fixed on the CPI data to be released by TurkStat, hence the expected increase in of civil service pay and retiree pensions.
Remaining below the core inflation rate due to declining prices in some seasonal items, the annual CPI remained at 38.21%, while the core inflation, index comprising essential goods and services we need to buy regularly regardless of the season, turned out to be 47.33% on a yearly basis. This data alone shows that there is a monstrous gap between the cost of living and the inflation rate.
Accordingly, the pay increase for civil servants and retirees was set as 19.77%, which is expected to be pushed further higher as civil servant salaries will be re-arranged. Obviously, labour costs will increase significantly in state universities, government agencies and organizations. If the causes of inflation had been addressed properly, we would not be suffering the severe consequences we are suffering today.
Now everyone is wondering:
– If the Central Bank decides to stop hiking interest rates because of those who say, “policy interest rates have increased, but exchange rates continue to rise”, will we be willing to put up with inflation in order not to sacrifice economic growth?
– If concerns about inflation continue to grow, will pushing policy rates down to 20% be enough to ease these concerns?
– When interest rates are raised, will the exchange rates continue to rise as well?
My answer to the first question is that we are already fighting inflation indirectly to ensure growth. Therefore, I would not be surprised if the CBRT decides to no longer hike rates, or to raise them gradually.
The answer to the second question is a resounding no.
And my answer to the third question is that exchange rates are likely to rise.
So, the gap between the cost of living and the CPI will inevitably widen even more, which will lead to further deterioration in pricing behaviour, especially as exchange rates continue to rise. I wish I could bear good news on this morning where we woke up to additional taxes, but sadly this is just the reality.