Is it right to make critical decisions based only on inflation?

Fed and CBRT are to release back-to-back decisions next month. Obviously, inflation plays a key role in the making of these decisions. But I have my concerns.

To shed further light on this issue, I would like to share with you an analysis jointly conducted by European Commission and Eurostat. Covering the years between 2004 and 2017, this report tackles inflation in EU and Euro Countries from two different perspectives:

  • Perceived Inflation
  • Expected Inflation

First, let me tell you the most interesting result of the analysis: The inflation rate perceived by the citizens of EU countries using the euro and the citizens of EU countries that do not use the euro seems to be almost identical. Although governments release nearly same inflation rates, the inflation perceived by people is much higher than official inflation numbers.

However, a 5 pts gap sometimes occurs between the perceived inflation and the expected inflation, which is a very high for EU Countries indeed.

The “Everyone feels the same” argument won’t help us…

This being the case, there are severe gaps between the perceived inflation and the expected inflation everywhere. In Turkey, however, we see a drastic difference between the perceived inflation and the actual one, which considerably damages the credibility of Turkey’s economy policies. If the government fails to convince people to believe in the authenticity of economic events, people would not change their buying behaviour, consequently resulting in a long, painful process of change.

However, I must indicate that I have concerns about the fact that inflation is the most determinant factor in the making of economic decisions, because there are many other factors entering the equation today, let alone the fact that we no longer can keep proper track of price movements as we easily did in the 1990s.

This is one of the reasons why unemployment rate in Turkey never goes down. There are many people today working in the informal sector that we should absolutely take into account, including social media celebrities as well as people who are working jobs that didn’t exist ten years ago. That is why we should develop our monetary and financial policies using the most accurate parameters as well as being aware of broken ties among perception, reality and expectation. Failure to do so may result in a lower probability of success.