The Central Bank at least knows why there is inflation

felt too much of the trouble of inflation until recent much WE HAVEN’T about what kind of trouble inflation is until recently. Previously, there wasn’t a shortage of bread, queues at filling stations, and or bureaucrats who say they increased meat prices to prevent long lines of people waiting at butchers. We didn’t need inflation teams, and TRY wasn’t indexed to other currencies with FX-protected TRY deposit accounts.

Those days weren’t perfect, but they weren’t as miserable as things are now.

People know about inflation all too well. But what does the Central Bank (CB), whose primary objective is to achieve price stability, think about this?

Let’s look at what the CB says and does about inflation and price stability. The CB defines inflation as ‘the persistent increase in the general level of prices of goods and services in an economy.” They also say that, “Today, many central banks are striving to attain stability by keeping inflation under control. In other words, they are trying to achieve price stability.”

The CB also defines price stability as follows: “Price stability refers to an inflation rate low and stable enough that it would not influence the decision-making processes of economic agents. It is instrumental in growth and employment - the longterm targets of monetary policy. The primary objective of the CB in Turkey is to achieve and maintain price stability. Price stability does not necessarily imply that prices do not ever change; rather it entails avoiding persistent increases (inflation) or decreases (deflation) in the general price level. In this way, the purchasing power of TRY and hence its credibility as a currency unit would be preserved.”

The last expression is fantastic, isn’t it? You know it, but you don’t do the necessary things to keep prices down.

Who knows about inflation better than the CB? Let’s look at what they have to say about it. The CB says four main factors lead to inflation in an economy:

>> Demand-pull inflation

>> Cost-push inflation

>> Money supply

>> Inflation expectations

The main reason for inflation in Turkey is cost-push inflation. But what does the CB do about it?

The CB is taking precisely the opposite steps to those recommended. More precisely, the CB stands by as policymakers take entirely the wrong steps.

The way to prevent a high-cost increase is to keep FX low and ‘give an arm and a leg ’ for to prevent a surge in domestic prices of imported goods.

The way to do this is obvious. But our central bank is doing the opposite.