The way to solve inflation is through solving structural problems

There are several factors that determine the inflation rate in Turkey. Energy prices, the fluctuation in exchange rates and food prices are elements that directly determine the inflation rate. Of course, there are other elements besides these.

One of the factors that has a high level of impact over inflation is energy prices. The oil shocks and crises in the past have been seen on many occasions to cause a rise first in energy prices and then in production costs. It is clear that naturally, this leads to the increase of inflation.

The increase in prices of imported goods following activity in exchange rates or the devaluation of the Turkish Lira (TL) stands out among the elements that push the inflation rate higher.

The factors leading to the increase of the inflation rate are, actually, also the problems in Turkish economy that we identify as structural. Therefore, facing our structural problems and solving them also means finding a solution to the problems pressuring inflation.

Because, reducing external dependency in energy will also alleviate the pressure of energy prices on inflation. In other words, steps that will decrease energy dependency, which is one of our structural problems, will also reflect positively on the reduction of inflation in the country.

One other matter is the problem in finance. The financing required for investments and projects need to be provided under reasonable terms, resistance against likely financial shocks need to be increased and the fluctuation in exchange rates need to be reduced.

This way, both the financing problem will be solved and the inflation rise due to fluctuation in exchange rates will be prevented. At this point, as we always say, the aim to make Istanbul a finance hub must be carried out with determination.

All these efforts and the steps taken will ensure bilateral benefits. This way, both the structural problems that have prevented Turkey’s economy from gaining momentum for years will be solved and the pressure on inflation will decline.

SOLUTION FOR FOOD INFLATION

One other issue is food inflation. Turkey is an agricultural country where numerous agricultural products are produced. Having such an advantage, enables an opportunity to eliminate the negative effects of food prices on inflation.

This advantage needs to be used. Especially while food prices around the world are dropping, food inflation is the last thing Turkey, a country that grows various agricultural products, should be dealing with. Decisions to be taken by the Food Committee, which are effective right at this juncture, are critical for food inflation.

The Food Committee applies short-term measures to reduce the fluctuation in food prices. These are structural measures that will increase food demand and decrease the fluctuation in food prices. For example, reduced waste rates in fruits and vegetables, decrease in storage and unrecorded economy, and logistics quality will be the prominent implementations.

Product planning is essential to prevent fluctuation in food prices. The lack of product planning disturbs the supply-demand balance. How? Well, there is a period in which a product is profitable; all producers focus on this product and in the following period, while there is supply excess in a single product, the production of other products drops. Naturally, this leads to a fluctuation in prices.

The academic response to this situation is the Spider Web Theory. In other words, periodic and continuous fluctuation in certain product markets and prices.

INFLATION AND ECONOMIC GROWTH

The inflation rate is actually one of the most well-known problems of the Turkish economy. There have been times inflation was depicted as “the inflation monster” to describe the magnitude of the inflation rate.

However, the positive change in many macroeconomic indicators that took place after 2002 were reflected on the inflation rate as well. Yet, despite the serious drop in the inflation rate, due to the inherent structural problems, it still has the potential to be a problem in the economic balance.

Inflation has the power to effect both price stability and economic growth. Hence, reducing inflation is always a top priority economic goal. Because price stability and inflation dropping to single digits had a great role in the threefold growth in gross domestic product (GDP) after 2002.

Hence, choosing economic growth alone as a goal is not enough. The increase in income per capita, reaching positive figures in many macroeconomic indicators are directly related to the decrease in the inflation rate. In other words, before an economic growth-inflation dilemma occurs, the two indicators need to be managed in a way that they support each other.

Therefore, the real objective is not single-digit inflation, but for the inflation rate to be even lower.

Because there are examples of countries that have low inflation rates where, with such low rates, growth increases, unemployment drops and despite low interest rates, investors increase their investments.

Upon viewing these examples, it is evident that the main point is that they produce permanent solutions to matters we call structural problems and that they remain patient and determined throughout the process.

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