When Can Disinflation Happen in Turkey Under These Conditions?

Arif, go and get money from your Uncle Osman, buy me two lahmacuns and an ayran.

I'll give you an apple from the garden!

Yes, Aynur Abla, I'll bring it right away.

*

Uncle Osman, Aynur wants lahmacun and a glass of ayran. Can I have some money?

Here's 50 liras for you Arif, but bring the change!

OK, Uncle Osman!

***

If this scenario had happened last year, this shopping could have been done for 40 liras if we say the price of lahmacun is 15 liras each, two lahmacuns for 30 liras and 10 liras of ayran. Arif would have given 10 lira change to his Uncle Osman.

This year, in a not so luxurious lahmacun shop in Istanbul, the price was 50 liras each! 

Ayran is 25 liras. 

In other words, you have to pay 125 liras for two lahmacuns and one ayran. In some places even this money is not enough!

If Uncle Osman gives Arif 150 liras this year, Arif can leave 25 liras change to Uncle Osman and buy an apple from his sister Aynur, which he loves to eat very much.

***

This small scenario is actually a simple business scenario in the market.

As a small business, Arif can be thought of as a service sector that takes the product from the producer (in our scenario a lahmacun parlour!) and delivers it to the consumer (i.e. Aynur's sister) for a small profit (an apple from the garden!).

The financing is provided by his uncle Osman, who can be called the "bank" from which he gets a loan.

In our scenario, Arif buys and eats an apple regardless of the producer's prices, in other words, he is fed in any case.

Uncle Osman, on the other hand, has to pay more money each time, but he probably earns well too.

***

Well, Uncle Osman, no, I won't give any more money, tell Aynur to have a snack at home.

What if he says I forbid you to eat lahmacun from the bazaar now, it's too expensive?

Aynur can't eat lahmacun!

That's it?

Yes, Arif will lose one of his favourite apples!

Not only that, the lahmacun shop will be deprived of a customer.

Don't say that one customer is nothing, Arif, Ahmet, Mehmet and the lahmacun shop will definitely be seriously affected.

***

If we go back and look at it from Arif's point of view:

Mrs Aynur may somehow find a way to feed herself at home.

However, in order for Arif to eat his daily apple, perhaps he will have to sneak into the garden and steal apples from the tree!

No way, his sister Aynur loves him very much, she will give him an apple even if she doesn't bring him lahmacun.

And you're right, she'll give him one, she'll give him two.

That's not how things work in normal life!

Sooner or later Arif will be deprived of his apple.

This situation leads to the closure of small businesses like Arif and unfortunately the result ends up with an increase in crime rates in the society.

***

If we go back to the angle of Lahmacuncu, it loses a customer just on the basis of our scenario.

However, he will have to downsize as he loses a customer from there and a customer from here.

Maybe he will have to terminate the jobs of some of the employees he employs.

Here is the unemployment problem!

Unemployment will be the problem of the future because of the developing technology. 

Is there any point in exacerbating this problem already with bad economic management?

***

Back to our scenario, does the problem end there?

No, this problem affects other businesses in a chain.

The flour producer is also affected by this contraction, as well as the meat producer. 

Even buttermilk producers and onion producers.

***

Then don't let the lahmacun shop raise their prices!

But nobody raises prices for no reason!

If we ignore social immorality, it does not make sense for prices to increase for no reason.

The flour seller increases the price of flour because the price of wheat has increased, the transport price of the vehicle bringing flour because the fuel cost of the vehicle bringing flour has increased, the ayran producer increases the price of ayran because the price of milk has increased, and the lahmacuncu increases the price of lahmacun out of necessity.

Since the cost increases, he also has to increase his prices.

***

Disinflation!

Yes, Mr Gaye Erkan, the new (or should we say brooch in his lapel?) president of our central bank, used this word in his presentation.

So what does it mean? What does disinflation mean?

If inflation means rising prices, disinflation must mean falling prices!

No, disinflation does not mean falling prices, unfortunately.

This term means a decrease in the rate of increase in prices, i.e. a decrease in the inflation rate.

Only when inflation falls to zero will prices not increase but remain stable.

There is no question of prices falling backwards. This is against the nature of things.

The cost of the goods you buy today is already certain, you will sell them at a profit so that you can make money.

If you sell below cost, at best you will consume your capital.

Therefore, it is not possible for prices to fall backwards under normal conditions.

However, with the logic that it is profitable wherever we return from the loss, or we cannot sell with such profit enthusiasm, at least by saying that we can reduce our profits, maybe sellers can reduce prices.

***

I don't know how high the price of lahmacun will rise, but when it reaches twice the current price level, if inflation is zeroed out, it means that we will buy lahmacun for 100 liras, for example, after that date.

In other words, disinflation does not mean a decrease in prices. It means a decrease in the rate of increase.

***

When the Governor of the Central Bank, Ms Gaye Erkan, used this term in her presentation, some people said okay, look, prices will fall.

I wish prices would fall, I wish the inflation rate would be at negative levels so that the purchasing power of low-income citizens would increase.

But unfortunately, as Ms Gaye Erkan said in the presentation, prices will tend to increase at least until the second quarter of 2024.

Even this is a rather optimistic forecast.

***

Interesting!

So the local elections will also be fought with rising prices! Is that so?

Who knows what level the dollar will have risen to on those days?

Who knows how much a lahmacun will be in those days?

Today, I wrote the price of lahmacun as 50 liras in a kebab shop in Istanbul, but there is even news on the internet that the price of lahmacun-ayran in touristic places is 450 liras.

And this news is dated 15 March 2023!

I think this is really a very optimistic forecast, in fact, saying that inflation will continue to increase is in a sense a confession!

In other words, Mr Gaye Erkan was talking about a negative future, especially for low-income people!

***

Well, wasn't there something promising about the future in the presentation of Mr Gaye Erkan, the Governor of the Central Bank?

Of course, she talked about the increase in reserves, the decrease in the risk premium and many other positive issues.

I have nothing against her good intentions and personal endeavours.

Although the central bank has raised its year-end inflation forecasts (probably staying within the framework of TURKSTAT data), I can say that these forecasts are very well-intentioned.

I hope that the inflation felt at the end of the year will remain at the levels mentioned by Mr Erkan, i.e. 58%.

Although the inflation rates of ENAG and other independent organisations are already well above this estimate.

***

The lady also talks about monetary tightening measures.

What is monetary tightening?

Measures to reduce the central bank's money supply in the market!

In other words, she says that interest rates will continue to increase, the fluctuations in the exchange rate will be taken under control, and the liquidity in the market will be reduced through other methods.

Will he be able to increase interest rates sufficiently despite Mr Erdoğan?

I can say that he does not inspire any confidence in this regard.

Even though he has told a foreign press representative in English that the Central Bank of the Republic of Turkey is an independent institution, I do not think that our President will allow Mr Hafize Gaye Erkan to increase interest rates to the levels required by economic rules.

How then will inflation be brought under control? 

Didn't Ms Erkan say at the press conference that the main task of the central bank is to ensure price stability?

He says we will reduce liquidity in the market! He also mentions other measures.

Although reducing liquidity in the market is useful for controlling inflation, it is a harbinger of the fact that in case of income imbalance, especially low-income citizens will have much more difficulties.

In other words, Mr Erkan is talking about a plan in which low-income citizens will suffer from these measures!

In our scenario above, Uncle Osman, that is, banks were not lending to small businesses!

This situation was already causing problems in the functioning of the market!

Aynur could only eat lahmacun if she had her own money in her pocket.

Since Aynur did not have her own money, there was a problem for the lahmacun seller to sell lahmacun and there was a problem for Arif to eat apples.

Now it is said that the restriction on loans will continue!

***

She said we'll see how it goes, we're watching it, Mrs Gaye.

She mentioned that there was an increase in loan lending!

It is true, although the loan interest rates are quite high, it may be the summer months, there may be those who can get a loan, I would consider using a loan without thinking about this inflation rate, it may make sense to use a loan under these conditions. 

However, you can reach the loan if the banks give it, of course.

Since you say that there is an increase in loan utilisation, it means that banks are lending to some people.

Who are these people who can use credit?

***

In short, although Ms Hafize Gaye Erkan is enthusiastic and very knowledgeable in her field, she is not alone in these matters.

As it can be understood from the fact that she has accepted this duty under these circumstances, she knows how to avoid difficult questions with her quick wit, without getting involved in politics as much as possible.

Didn't he say that the Central Bank no longer uses the backdoor market intervention protocol, he says that we give foreign currency directly to the banks, they intervene in a sense.

What a good answer!

To those who understand, he is actually saying the same old same old, but at the same time he is saying no to the question.

Do you think there can be a better political answer?

***

I think that Mr Erkan, who is a good representative of the white elite, has an open path in the political arena.

I hope that with his quick wit, he will be able to influence the President of the Republic, whom no one can get to listen to him, and maybe he will help us to recover a little bit.

***

But don't forget, he is also calling for a bitter prescription, albeit implicitly!

I say be prepared for a bitter prescription.

Love and respect to everyone from Moscow.