What should be done against the inflation nightmare, melting wages and salaries?
According to TURKSTAT data, consumer inflation increased to 70 percent in April and producer inflation rose to 122 percent. We are literally facing a raging inflation. Official consumer inflation was 16 percent a year ago, and official producer inflation was 38 percent again. There is a jump of 54 points in the first and 84 points in the second.
Inflation is a complete nightmare for fixed income earners. Wages and salaries are rapidly melting away. Take, for example, the situation of the net minimum wage against inflation. The purchasing power of a person earning the minimum wage is now below what it was four years ago in April.
THE MAIN CAUSE OF INFLATION
We know the main cause of very high current inflation: Reducing the monetary policy rate by five percent during September-December 2021 period, despite warnings to strictly avoid such policy, by experts based on the experience of countries that have experienced high inflation in the past and simply because science of economy requests not to cut interest rates in similar situations – followed by an extraordinary jump in the exchange rate.
If the Central Bank had been independent and able to make decisions in accordance with the main task assigned to it in the law (rather than being instructed by the head of government), ensuring price stability, inflation would not have sky-rocketed. Yes, commodity prices are rising all over the world. In addition, the pandemic and the Russia-Ukraine war led to shortages in the supply of some goods. These elements have raised inflation in most countries. But if Turkey had not made interest rate cuts that made exchange rate skyrocket, the increase in inflation would have been very limited.
WHAT KIND OF POLICIES SHOULD BE APPLIED?
It is very easy to prove what is briefly stated above, accompanied by a detailed scientific analysis. Then it turns out that the sine qua non of the economic program that needs to be implemented to reduce inflation is to make the Central Bank independent and of course, to bring/employ qualified personnel who will facilitate the decision-making of the independent Central Bank in accordance with its main purpose.
Once monetary policy is on track, the rest is easy. The budget deficit can be kept at reasonable levels – for example, the authority can review “contracts with guarantee income in foreign currency”, and gradually end the “exchange rate-protected deposit system” not to forget avoid pumping of excessive loans to the market.
CREDIBILITY ON FINANCIAL MARKETS
These measures would certainly need some time to show the positive impact required on the economy. Together with the improvement the economy management’s credibility in world markets which would enable the government to find foreign loans with much lower interest rates and bring in foreign direct investment, Turkey would certainly enjoy better times as far as the welfare of its citizens are concerned.
Source: Main content by Fatih Özatay on yetkinreport.com – TRANSLATED and edited with additions
