Article: How Can Inflation in Turkey Be Reduced?

In Turkey, the bargaining power of labor is very weak due to low unionization rates. At the same time, many firms have significant pricing power. In such an environment, any anti-inflation program must primarily restrain demand increases. This requires fiscal and monetary discipline.

Inflation is often discussed as if there were a simple “formula,” but in reality, it is not a mechanical problem. Many countries that once experienced high inflation have successfully reduced it to low single digits, and importantly, this stability has been sustained over long periods. Turkey itself has a similar experience between 2002 and 2016, when inflation dropped from around 72% at the end of 2002 to single digits in 2004, and remained relatively stable for years.

Moving Beyond the “Demand vs Cost Inflation” Debate

One key step is to move away from the debate of whether inflation is “demand-driven” or “cost-driven.” Once inflation accelerates, these factors become deeply intertwined.

Demand plays a crucial role because in a high-demand environment:

• firms with pricing power can raise prices more easily
• workers may gain more bargaining strength

Even in alternative economic models, capacity utilization is an important determinant of wage and price dynamics, showing that demand cannot be ignored.

Given Turkey’s weak labor bargaining power and strong corporate pricing power, controlling demand becomes essential. This requires:

• fiscal discipline (controlled budget deficits)
• monetary discipline (interest rates above inflation)
• limiting excessive credit expansion

Exchange Rate, Trust, and Structural Weaknesses

Since Turkey relies heavily on imported inputs, exchange rates are a major driver of production costs. Therefore, pressures that lead to currency depreciation must be reduced. This involves lowering demand for foreign-currency assets and increasing confidence in the local currency.

However, interest rates alone are not enough to achieve this. While positive real interest rates are necessary, they are not sufficient. Long-term stability depends on restoring trust in the system and eliminating structural vulnerabilities that continuously trigger foreign currency demand.

Among the key structural issues, the legal system stands out. A fair and efficient judiciary is essential for building trust. In addition, the monetary policy shift initiated in 2021 significantly increased inflation, and the institutional framework supporting such policies needs reform. Public procurement rules that create inefficiencies, institutional changes in statistical agencies, and industrial policies aimed at productivity are also part of the broader reform agenda.

The Importance of Structural Reform

Major reforms in key areas can significantly change economic expectations. These include:

• strengthening the judicial system
• reforming monetary policy institutions and frameworks
• improving procurement systems to avoid fiscal inefficiencies

Equally important is acknowledging past policy mistakes and restoring credibility in economic management. Without this trust, monetary and fiscal measures alone cannot ensure lasting disinflation.

External Conditions

Favorable global conditions can make inflation control easier, but they are beyond domestic control. What matters is implementing the correct domestic policy framework consistently and effectively.

Author: Fatih Özatay (ekonomim.com) 07 May 2026

Keywords: #InflationTurkey #FatihOzatay #TurkeyEconomy #Macroeconomics #MonetaryPolicy #FiscalDiscipline #ExchangeRate #EconomicReformTurkey #CentralBankPolicy #CostInflation #DemandInflation #StructuralReform #TurkeyInflation #EconomicStability