Global inflation pressure… The most problematic economic agenda of the last period revolves around the concerns created by global inflation. Although this problem affects the dynamics of both developed and developing countries with different coefficients, it has created a serious inflation in inputs and costs, especially in energy and commodities. In addition to energy input, the supply chain in general, climatic conditions and political crisis phenomena also cause logistics problems in countries where their production is intense, and we see this price pressure in products such as raw materials and agricultural commodities in general. Most important; Breaking the supply chain causes an economic slowdown as it also restricts production in the industry in terms of input supply.
Perspective of central banks… Inflation is not a new phenomenon and its first increase was not realized in March 2022. Inflation rates of 7.9% and 5.9%, respectively, have been reached in the US and the Euro Zone, and these rates are expected to go even higher. In this formation of inflation, together with factors such as production problems and cost incursions due to supply disruptions in the post-pandemic period, both the expectation that prices will rise and the loose financing conditions, with the effect of ample money supply, accelerated consumption. By managing this policy-induced inflation, central banks want to break the effects of past inflation on creating new inflation and keep marginal demand inflation under control.
The role of demand phenomenon in inflation… We can make two different categorizations about demand. The cumulative spending effects that emerged with the pandemic and the demand phenomena that came with the economic recovery fall into the first category. The loose financing conditions created by the monetary incentives introduced during the pandemic are in the second category that supports the demand phenomenon. Accordingly, pricing dynamics change. Unstable inflation expectations also affect consumption expenditures, and low financing conditions and the expectation that prices will increase even more cause rapid consumption and feed the marginal demand inflation phenomenon. The permanent income effect with the recovery in employment, the demand for higher wages in the face of inflation and in the supply of labor, and the increasing activity in the industry explain the effects on inflation through this channel. In a tight supply environment, this situation in demand accelerates inflation.
Comparison of Bloomberg Commodity Price Index and US-Euro Area inflation Source: Bloomberg
The situation in supply chain disruptions… This is not a new issue. A worldwide supply gap has emerged in the post-pandemic logistics and sourcing problems. Since this limited the supply of raw materials, it caused both an inflationary effect and a loss of momentum in the industry. The negative effect of logistics problems on international transportation continued as high freight costs after the pandemic lost its effect, and higher costs were included in the price of goods sold. This situation was reflected not only in the raw material trade, but also in the form of supply problems in the commodity group in general. Currently, we see these price pressures in all groups from energy to industrial metals, from food to precious metals all over the world. The special situation related to the additional break in raw material and food resources related to the Russian war in the last period will layer the effects of supply gap on inflation.
Turkey situation… Turkey is experiencing the main problem in this environment due to the fact that it is an import-intensive economy. Especially with the effect of energy prices, current account balance is negatively affected, and prices are rising rapidly due to the increase in global cost plus exchange rates. The instability in the exchange rate is an important element of uncertainty regarding the pricing of imported products in the domestic market. For this reason, while foreign exchange increases can be reflected in prices quickly, the sticky effect comes into play in periodic exchange rate decreases and there is no or very little reflection on prices. In terms of the new economy perspective, Turkey's desire to provide a roadmap to increase exports by keeping interest rates low causes the necessary monetary policy response to inflation not to be given.
During the implementation of the low interest policy, the rate cuts made by the Central Bank accelerated the increase in the exchange rate. In this context, there is an annual inflation that has reached the level of 54.4% as of February 2022, and it is understood that this rate will increase even more with the current effects.
Fighting inflation seems to be divided into two branches in the current economy perspective. First; It is a financial product that guarantees increases in foreign currency exchange rates and encourages real persons and companies to open TRY accounts with the aim of contributing to price stability. Although there were rapid entries in the first stage after this product was commissioned, we think that the progress of the 590 billion TRY size reached today will not be as fast as before. Regulations on this product to create new attraction elements that expand the scope and shorten the maturities can be made as needed. However, the important thing is that the system can feed itself. If the increase in foreign currency continues, the said burden increases the borrowing and financing requirements of the Treasury and creates an inflation effect on the budget financing. In conversion from foreign currency, on the other hand, as the amount required to be met by the Central Bank increases, inflation may occur with the effect of monetary expansion.
We do not expect the net effect of the recent tax cuts on food, basic products and a few items to be depressing on inflation as the pressure on tax-free prices continues. The scale mobile system, which provided significant subsidies for fuel products in the past, cannot prevent the reflection of costs on pump prices as the SCT margin has expired, and pump prices increase as oil prices increase in the world. In energy consumption, especially in natural gas, the global cost effects of the last Russian crisis are effective in the increase in consumption prices despite the subsidies.
It is understood that financial stability and price stability should be ensured through the production of planned, predictable and targeted policies in the fight against inflation. In order for this to happen, it is necessary to create an attractive real interest rate and reduce the risk premium through monetary policies with a perspective that fosters returns and confidence in the short term. Progress should be made towards creating investment attractiveness that will reduce the sensitivity of the economy to external financial fluctuations, diversifying the economy, creating export-based strategies, ensuring import substitution and creating stability and reliability in non-economic areas.
Conclusion? Central banks take steps to prevent inflation. In this context, the major central banks, the Fed and BOE, have started to increase interest rates and display an image that will continue this business in series. The continuation of the supply constraints in the world and the uncertainty created by the war limit the policy areas of the Central banks and show that the decrease in inflation can only be controlled to a certain extent. In addition, the possibility of policy makers who think that they may have missed the inflation curve, to make rapid interest rate increases that will harm the economy is seen as a risk and feeds the recession concerns about the upcoming period. In this process, the logic of interest rate increases is based on keeping the inflation in a predictable path by controlling consumption, and waiting for the geopolitical problems to be overcome and external effects to be eliminated for normal targeted rates. However, if commodity prices fail to fall and we see that tight financial conditions suffocate economies due to excessive interest rate movements, this phenomenon carries the risk of driving the global economy towards stagflation.
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