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    It has become even more tangled

    Fatih Özatay, PhD04 January 2014 - Okunma Sayısı: 1250

    With saving instruments such as deposits and bonds having no real return, consumption was encouraged.

    Rumor has it that 100 truthful economists, each from a different country, were once summoned and asked to answer a simple question:

    “Here are some mean values for you: the rate of interest on the mostly selected deposit maturity is 7.7 percent, that on the most-traded government bond is 7.4 percent, and the central bank’s lending rate is 5.8 percent. In this hypothetical country with 7.5 percent CPI, government officials and the economy management lay great stress on the high level of current account deficit. They believe that reducing consumption is the key to fighting with the deficit. On the other hand, there is a famous saying that could be directly translated as “neither diet nor a cabbage pickle.” The origin is that dieticians and physicians don’t recommend eating cabbage pickle when you are on a diet. The saying hence implies that there is a big inconsistency. So, do the above figures validate this saying or is the saying irrelevant for this case?”

    All 100 of the economists rushed out of the room furiously. “Did you bring us here for that? Why did we travel miles away for this question the answer of which is as clear as the day?” they said.

    Yesterday inflation figures for December were released. CPI increased year-on-year by 7.4 percent and the year-end CPI reached 7.5 percent. The mean figure was the same since 2009. True, it is not the end of the world that inflation seems to be rigid at this level. But there are three problems to consider, with which the rigidity in inflation could have become a significant issue.

    The first is about the agents who rely on the official target and make decisions accordingly. Mean of the CPI over the last three years was 7.6 percent while the targets were 5.5 percent in 2011 and 5 percent in 2012 and 2013. Unless the contracts – particularly wage contracts – have retrospective terms of compensation, this meant losses for wage-earner and profits for employers. This damaged income distribution. In the case that the contracts involved compensation, the inflation rigidity strengthened, making it harder for the administrations that want to tackle inflation.

    The second problem: Turkey faces severe competition in its export markets. Its inflation is higher compared to its rivals. In other words, Turkey’s production costs are relatively higher and this weakens its international competitiveness.

    The third problem (the “diet-and-the-cabbage-pickle” issue): given the current global environment and the expected tightening in international financing since May, Turkey - as a country which has a high current account deficit and hence a high foreign borrowing requirement – has kept the interest rates that it can control significantly below the inflation. With saving instruments such as deposits and bonds having no real return, it has encouraged consumption. In other words, the problem we have been complaining about has become even more tangled.


    This commentary was published in Radikal daily on 04.01.2014