New era in Turkey's fight against inflation

Published 08.09.2017 01:46

The above-expectation August inflation rate and the high producer price index (PPI) have only targeted growth and it prompted certain circles to take quick action to reduce the growth rate.

Until recently, the reason for inflation and the fight against inflation in Turkey has been misidentified and done wrong. The Phillips curve, which says that inflation and unemployment move in opposite directions, was true for developing countries only for a short time. After all, William Philips came to this conclusion by examining one period of the British economy.

Today, Europe and the U.S. are striving to create inflation through monetary measures such as zero or negative interest rate policy and asset purchases in order to reach a natural unemployment rate that can be considered normal. But, this is a futile effort. Moreover, even if they can achieve the inflation figure that they aim for with this method, it is ambiguous whether they can bring unemployment to natural levels.

On the other hand, developing countries have a futile inflation target that is the result of a similar approach. This means a fight against inflation that is based solely on tight monetary and fiscal policies and that creates unemployment. In fact, this approach implicitly plans that higher inflation figures would lead to a better control of inflation. For this reason, it includes the initial philosophy of policies that keep wages low, transfer resources to the top, impoverish the country and reduce growth.

The argument that "Turkey's average growth rate of more than 5 percent is the reason for chronic inflation" becomes true only as a result of bad economic policies. On the contrary, an export and industry-oriented, inclusive and high growth is the main remedy to an inflationist process.

The Central Bank of the Republic of Turkey (CBRT) is now showing the tightest monetary policy stance possible within the framework of inflation targeting. The inflation rate is now the primary issue for the CBRT as required by its mission. Therefore, the central bank is maintaining a multi-faceted and multi-dimensional anti-inflation policy. In this sense, it does not limit its fight with monetary policy alone. The food inflation and price bubbles depending on intermediate goods imports are the bank's direct fields of occupation and interest.

The gap between producer and consumer prices, which manifests itself with the producer price index bubble, shows us the quality of Turkey's inflation and how it should be fought and reduced. Even this phenomenon alone tells us that the current inflationary process is impossible to normalize with monetary measures alone.

In this sense, perhaps for the first time in Turkey the root cause of the inflation problem and its solution have been identified correctly. While the CBRT is struggling with inflation and monetary policy instruments as required by its mission, the government also supports it with a pro-growth economic policy. This may seem contradictory at first glance, but when we look at the cause of inflation in Turkey, we need to determine that this is the essential thing to do.

I am putting forth all this based on the fact that Turkey is jointly maintaining its fight against unemployment and inflation. So, we cannot think that Turkey is fighting unemployment alone or inflation alone, as both problems stem from the same reason. In this case, high chronic inflation is also the result of a high and ossified unemployment - which means stagflation. It is not accidental that upward and downward trends in unemployment and inflation coincide most of the time. And this correlation is at a high level now. In fact, the fact that the producer price index has remained high for a while is one of the most important indicators of this.

Producers endure rising input costs, and financing in particular, as market conditions in both exports and domestic demand shuttle between stagnation and invigoration and price competition is at the highest level. In this case, producers resort to optimization through more output with intensive labor and less staff. Due to the rigidness in the labor market and the rising labor force participation, this is one of the reasons especially for youth unemployment. However, this problem is also the main reason for the production-based inflation.

Moreover, as the latest inflation data shows, consumer inflation comes above expectations as a result of the rapid transfer of producer price index in seasonal dynamism periods or in periods when consumers have compulsory expenditures.

Well, is this situation a permanent upward trend at the same time? Definitely not. Quite the contrary, by ensuring easy access to financing through practices such as the Credit Guarantee Fund (CGF), highlighting incentives for exports and industry, and launching measures that reduce intermediate goods imports and support producers, the production will be relieved in the coming months and, as predicted, we will approach the central bank's inflation targets by the end of the year. This will be achieved also with single-digit unemployment figures, as the current tendency reveals.

Consequently, Turkey is now maintaining the right struggle against both unemployment and inflation and their causes. We will continue with high growth and reasonable inflation rates and high employment. No one should doubt this.

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