Inflation; The Case of Turkey

Inflation occurs when the demand for money rises upon the availability of services and goods. When the money supply surpasses the economic growth, it drops the purchasing power and disturbs the economy (Fernando, 2022). The main cause of inflation is Monetary policy, Money supply, interest rates and exchange Rate. Henceforth, government’s policies influence economic variables such as Inflation rate, unemployment, the growth rate of income, and the distribution of income (Harriss, 1975). politics plays an integral role in the socioeconomic environment of a country, elections, and interest groups, political parties influences the policy-making process (Harriss, 1975).

However, covid pandemic, and war in Ukraine which has caused energy crisis have accelerated to persistent inflation in Turkey (Askew, 2022). Aside from external and global issues the persistent inflation in Turkey is due to the excessive intervention of the government in the Market. The Central Bank as the main agency also known as the monetary authority is the sole agency to print cash and impacts the cash flow in the economy (Heakal, 2022). While, political monopoly of the central bank in Turkey has reduced its efficiency and role in combatting the level of inflation (Heakal, 2022).

President Erdogan keeps the interest rates low through the central bank, he states “My biggest battle is against interest. “My biggest enemy is interest, he perceives higher interest rates harmful to the economy (Natasha, 2022). According to president Erdogan; Decreasing interest rates stimulate greater investments, export and job opportunities (Natasha, 2022). On contrary it has devalued the currency, raised cost of living, and disturbed the supply and demand in the market. As a result, the purchasing power drops drastically, According to Turkish Statistical Institute the CPI (Consumer Price Index) for year 2022 is 84.39 which indicates a rise by 30% since 2021 (n.d). Therefore, Turkey’s economy is victim to the monetary policy and political decision-making process.

The proposed mechanism to combat inflation is Monetary policy, it concerns the conduct of central bank in influencing currency value and availability of the money in an economy. The prices can be controlled through monetary means of adjusting the available amount of money in the market. The Contractionary monetary policy Is about increasing interest rates and lowering the money supply, in response the purchasing power decrease along the overall rise in prices. Nevertheless, in the case of Turkey the contractionary monetary policy is needed because it targets the high level of inflation. Interest rate is a mean for the central bank to impose charges for lending and borrowing money. In effect the real interest rate should be adopted to stabilize the cashflow and maintain the purchasing power rate.

In conclusion higher Inflation is considered a serious problem and it has a negative impact on social welfare, inflation makes the goods become expensive and at the same time drops the purchasing power. The higher prices of goods lead to more imports, the domestic industries weaken and it causes trade deficit. When the import exceeds the export trade deficit happen, the country consumes more than it produces, and it disturb the supply and demand equilibrium. The government in Turkey is persistently keeping the interest low, It has further accelerated the inflation which has caused devaluation in the country. Therefore, in order to curb the inflation, the government should employ a monetary policy and give the central bank autonomy to operate outside the influence of the politicians.

Fatima Kakkar