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    We need to take inflation seriously

    Fatih Özatay, PhD08 November 2011 - Okunma Sayısı: 1190

    Lately, many commentators stopped considering inflation as a key problem.

    Along with the global crisis, stimulating the financial sector, reviving the volume economic activity and reducing unemployment rate became the prominent objectives. Everyone excluding some weak voices in developed countries stopped talking about inflation. This climate has affected Turkey, too. Many commentators stopped considering inflation as a key problem. With the upwards movement in inflation rate lately, however, the question “will we be facing two-digit inflation rates again?” began to be evoked in our minds.

    Given the current circumstances, two-digit inflation rate cannot be persistent; it might only stay for a few months. So, it will not be considered as a critical problem in the economic agenda of Turkey occupied with the current state of affairs in the European Union. I believe that such a perception is quite erroneous for a country like Turkey which lived with high inflation for a long period. Experience is not the only reason for this argument. Let me state the other reason accompanied with some findings.

    The first thing is that when you rank the countries in terms of inflation rate in an ascending order on the basis of the IMF database, you see that Turkey ranks the twenty eighth in 184 countries. Let me repeat: Turkey ranks twenty eighth in 184 in the list of countries with the highest inflation rates. In 2010, average inflation rate in these countries was 4.7 percent. The rate for Turkey was 8.6 percent. On the top of the list is Venezuela with 28.2 percent. The below graph shows the inflation rates in selected countries.

    8.6 percent inflation rate that puts Turkey in the twenty eighth place might not sound high. To get to the second point, let me focus on the inflation rate starting with 2005, the year when six digits were omitted from the Lira. Between January 2005 and October 2011, consumer prices increased by 1.72 times. In other words, since the year when six digits were omitted, inflation in Turkey was 172 percent. The purchasing power of the 100 Lira banknote issued in the early 2005 to replace 100 million Lira banknotes dropped to 58 liras as of the end of October 2011. At this rate, we might soon have to issue a banknote of higher value. The third point relates to Turkey’s competitiveness. I am interested in the ranking of the countries on the basis of the percentage increase in prices between the end of 2004 and the end of 2011 (figures for 2011 are based on IMF estimations). Data is available for 182 countries. Turkey is fifty first in the league of countries that faced highest increases in prices. Average inflation in the mentioned period is 59.5 percent and the ratio for Turkey is 72.5 percent. Most of the countries that are in the same group with Turkey had lower inflation rates in the 2005-2011 period. It is evident that this creates a competitive disadvantage for Turkey.

    Annual inflation rates for 2010 in selected countries (%)


    Source: IMF World Economic Outlook database


    This commentary was published in Radikal daily on 08.11.2011