INFLATION

What Is Inflation?

Inflation is the decline of purchasing power of a currency over time. The decline in purchasing
power causes an increase in an average price level of a basket of selected goods and services in an
economy over some period of time. The rise of prices is generally indicated as a percentage and
means that a unit of currency mostly buys less than it did in prior periods.

When Inflation Is Good?

When the economy is not improving at capacity in terms of labor or resources, inflation theoretically
helps increase production. Much money means more spending, which equates to more aggregated
demand. More demand triggers more production to meet that demand.

British economist John Maynard Keynes said that some inflation was necessary to prevent the
Paradox of Thrift. If a country is becoming too productive and If consumer prices are allowed to fall
consistently, consumers learn to hold off their purchases to reach for a better deal.

Effects of Inflation

Inflation affects an economy in various ways, both positive and negative. Negative effects of inflation
include an increase in the opportunity cost of holding money and uncertainty over future inflation
which may discourage investment and savings.Positive effects include that central banks can control
real interest rates (to mitigate recessions) and encourage investment in non-monetary capital
projects.

What Causes of Inflation?

An increase in the money supply is the root of inflation, though this can play out through different
mechanisms in the economy. Money supply can be increased printing by the monetary authorities or
giving away more money to the individuals by legally devaluing.

In all such cases of money supply increase, the money loses its purchasing power. The mechanisms of
how this drives inflation can be classified into three types: demand-pull inflation, cost-push inflation,
and built-in inflation.

Types Of Inflation

Demand-Pull Effect
Demand-pull inflation occurs when an increase in the supply of money and credit stimulates overall
demand for goods and services in economy to increase more rapidly than the economy's production
capacity.

With more money available to individuals, positive consumer sentiment leads to higher spending,
and this increased demand pulls prices higher. It creates a demand-supply gap with higher demand
and less flexible supply, which results in higher prices.

Cost-Push Effect
Cost-push inflation is a result of the increase in prices working through the production process
inputs. For instance, when the expansion of the money supply creates a speculative boom in oil
prices the cost of energy of all sorts of uses can rise and contribute to rising consumer prices, which
is reflected in various measures of inflation.

Built-in Inflation
Built-in inflation is related to adaptive expectations, the idea that people expect current inflation
rates to continue in the future. As the price of goods and services rises, workers and others come to
expect that they will continue to rise in the future at a similar rate and demand more costs or wages
to maintain their standard of living.
Types of Price Indexes
Depending upon the selected set of goods and services used, multiple types of baskets of goods are
calculated and tracked as price indexes. The most commonly used price indexes are the Consumer
Price Index (CPI) and the Wholesale Price Index (WPI).

The Consumer Price Index

The CPI is a measure that examines the weighted average of prices of a basket of goods and services
which are of primary consumer needs. They include transportation, food, and medical care. CPI is
calculated by taking price changes for each item in the predetermined basket of goods and averaging
them based on their relative weight in the whole basket. The prices in consideration are the retail
prices of each item, as available for purchase by the individual citizens.

Changes in the CPI are used to assess price changes associated with the cost of living, making it one
of the most frequently used statistics for identifying periods of inflation or deflation.

The Wholesale Price Index

The WPI is another popular measure of inflation, which measures and tracks the changes in the price
of goods in the stages before the retail level. While WPI items vary from one country to other, they
mostly include items at the producer or wholesale level. For example, it includes cotton prices for
raw cotton, cotton yarn, cotton gray goods, and cotton clothing.

The Producer Price Index

The producer price index is a family of indexes that measures the average change in selling prices
received by domestic producers of intermediate goods and services over time. The PPI measures
price changes from the perspective of the seller and differs from the CPI which measures price
changes from the perspective of the buyer.
In all such variants, it is possible that the rise in the price of one component (say oil) cancels out the
price decline in another (say wheat) to a certain extent. Overall, each index represents the average
weighted price change for the given constituents which may apply at the overall economy, sector, or
commodity level.

What Is Hyperinflation?
Hyperinflation is a term to describe rapid, excessive, and out-of-control general price increases in an
economy. While inflation is a measure of the pace of rising prices for goods and services,
hyperinflation is rapidly rising inflation, typically measuring more than 50% per month.

Understanding Hyperinflation
Hyperinflation occurs when prices have risen by more than 50% per month over a period of time. For
comparison purposes, the U.S. inflation rate as measured by the Consumer Price Index (CPI) has
averaged about 2% per year since 2011 according to the Bureau of Labor Statistics. The CPI is merely
an index of the prices for a selected basket of goods and services. Hyperinflation causes consumers
and businesses to need more money to buy products due to higher prices.

Whereas normal inflation is measured in terms of monthly price increases, hyperinflation is

measured in terms of exponential daily increases that can approach 5% to 10% a day. Hyperinflation
occurs when the inflation rate exceeds 50% for a period of a month.

What Is Stagflation?
Stagflation is characterized by slow economic growth and relatively high unemployment—or
economic stagnation—which is at the same time accompanied by rising prices (i.e., inflation).
Stagflation can be alternatively defined as a period of inflation combined with a decline in the gross
domestic product (GDP).
Understanding Stagflation
The term "stagflation" was first used in the 1960s during a time of economic stress in the United
Kingdom by politician Iain Macleod while he was speaking in the House of Commons.2 Talking about
inflation on one side and stagnation on the other, he called it a "'stagflation' situation." It was later
used again to describe the recessionary period in the 1970s following the oil crisis when the U.S.
underwent a recession that saw five quarters of negative GDP growth.

Inflation vs. Stagflation: An Overview

Inflation is a term used by economists to define broad increases in prices. Inflation is the rate at
which the price of goods and services in an economy increases. Inflation can also be defined as the
rate at which purchasing power declines. For example, if inflation is at 5% and you currently spend
$100 per week on groceries, the following year you would need to spend $105 for the same amount
of food.

Stagflation is a term used by economists to define an economy that has inflation, a slow or stagnant
economic growth rate, and a relatively high unemployment rate.2 Economic policymakers across the
globe try to avoid stagflation at all costs. With stagflation, a country's citizens are affected by high
rates of inflation and unemployment. High unemployment rates further contribute to the slowdown
of a country's economy, causing the economic growth rate to fluctuate no more than a single
percentage point above or below zero.

Inflation In Turkey
Period of the 1923-1950
During the Ottoman period, there was a high increase in emissions. In order to finance the First
World War, the money in circulation was constantly increased by the Ottoman Empire. The kaime
(paper money) in circulation, which was 50 million liras at the beginning of 1917, reached 100 million
liras at the end of the same year. This situation caused the product prices in the market to increase
up to 20 times and caused a severe inflation.
Period of the Demokratik Parti
Fiscal and monetary policies implemented since 1950 led to a serious increase in inflation, and from
1954 it turned into a permanent inflation. Persistent inflation led to an increase in black market,
resulting in long queues for access to goods.

In addition, the deterioration of the foreign trade balance caused a shortage of foreign exchange in
the country. With the "Stability Decisions" taken on 4 December 1958 due to economic instability, it
was aimed to increase the foreign exchange reserve by reducing the demand for imported goods by
limiting imports.

60s
After the 1960 coup, liberal economic policies were abandoned, and thanks to the development plan
that was put into effect since 1963, a planned and low inflation period was experienced.

70s
Due to the two major oil crises in the world in the 1970s, prices rose in the unstable market
environment.The fourth five-year development plan was implemented in the 1978-1983 period, but
the program did not achieve the desired success in the economy. In particular, political instability and
security problems in the country led to a decrease in the effectiveness of the public administration
and an increase in budget deficits. Inflation increased significantly due to the meeting of these public
deficits from the central bank resources, the increase in the need for foreign exchange with the
development of the import-based industry in the country, and the oil crises. Inflation rose from 15%
in 1976 to 81% in 1979 and to 115% in 1980.

80s
Inflation, which was 115.6% in 1980, dropped to 21.9% at the end of 1982. In 1983, with the 45th
Government of Turkey, in which Turgut Özal was prime minister, the value of the Turkish lira was
kept low for the export-oriented growth strategy, aiming to increase exports, and inflation started to
rise again in an environment where prices were determined by the market. In 1988, inflation was
73.7%.

90s
In 1994, the largest public deficit and current account deficit in the history of Turkey's economy was
experienced. As a result, with the expectation of devaluation in the markets, the demand for foreign
currency increased and the interest rates increased up to 400 percent in order for the public to pay
their debts. In order to fight inflation, the "Inflation Control Program" was put into practice by the
Central Bank at the beginning of 1998.

00s
A new letter of intent was submitted to the IMF on May 3, 2001, and the 17th stand-by agreement
was revised. According to the Declaration of Economic Policies, it was stated that the price stability
policy will be continued and the economic conditions in which the inflation targeting strategy can be
implemented will be provided as soon as possible. The 18th stand-by agreement was requested with
a new letter of intent, considering that the effects of the 2001 economic crisis continued and the
current stand-by agreement could not meet the needs due to the September 11 attacks and the
negativities in the world markets. Although 35, 20 and 12 percent inflation rates were targeted for
2002, 2003 and 2004 in the new program, an inflation-oriented strategy could not be implemented.
Therefore, the period between 2000-2004 is defined as the implicit inflation targeting period by the
Central Bank.

2022
The annual inflation rate in Turkey accelerated for the 11th consecutive month to 69.97 percent in
April of 2022, the highest since February of 2002 and surpassing market estimates of 68 percent. It
compares with a much lower rate of 17.14 percent a year earlier, as the lira remains weak and real
interest rates remain largely negative. Main upward pressure came from food and non-alcoholic
beverages (89.1 percent vs 70.33 percent in March) and transportation (105.86 percent vs 99.12
percent), largely due to surging prices for energy (118.2 percent) amid the war in Ukraine. Costs also
significantly rose for housing and utilities (61.14 percent vs 51.43 percent), furnishings and
household equipment (77.64 percent vs 69.29 percent), and hotels, cafes, and restaurants (69.26
percent vs 60.4 percent). On a monthly basis, consumer prices rose by 7.25 percent.

TERMS
Aggregated Demand: Toplu Talep

Basket: Piyasa sepeti

Basket: Piyasa sepeti

Built – in effect/inflation: dahili etkisi/enflasyonu

Bureau of Labor Statistics: İşçi/İş gücü istatistikleri bürosu

Circulation: tedavül

Consecutive: art arda

Consumer Price Index: Tüketici Fiyat Endeksi

Consumer Price Index: Tüketici Fiyat Endeksi

Cost – push effect/inflation: maliyet itme etkisi/enflasyonu

Current account deficit: cari açık

Demand – pull effect/inflation: talep çekme etkisi/enflasyonu

Demand supply gap : arz talep boşluğu

Deterioration: bozulma

Devaluation: devalüasyon

Devaluing: devalüasyon

Export-oriented growth: ihracatı artırmaya yönelik büyüme

Fiscal: maliye

Implicit: örtük

Letter of intent: niyet mektubu

Monetary authorities: para otoriteleri

Money supply : para arzı

Non-Monetary Capital Projects: Parasal Olmayan Sermaye Projeleri

Paradox of Thrift: Tasaruf Paradoxu

Positive consumer sentiment: olumlu tüketici duyarlılığı

Price Index: Fiyat endeksi/listesi

Printing: para basmak

Producer Price Index: Üretici Fiyat Endeksi

Public deficit: kamu açığı

Purchasing power: alım gücü

Real İnterest Rates: Reel faziz oranları

Recessionary period: durgunluk dönemi

Submit: sunmak

Surpass: aşmak

Upward pressure: yukarı yönlü baskı

Wholesale Price Index: Toptan Eşya Fiyatları Endeksi