Why Is Inflation Not Dropping? Economist Mahfi Egilmez Reveals the Structural Reasons
Why isn't inflation, which has become a chronic wound of Turkey's economy, entering a lasting downward trend despite the recent measures taken? In his latest analysis, renowned economist Mahfi Eğilmez answers this question and draws attention to the critical shortcomings in Turkey's economic management.
Economist Mahfi Eğilmez has shed light on the reality of inflation.
Economist Mahfi Eğilmez has revealed the truth about inflation on his personal website. According to Eğilmez, who poses the question 'Why isn't inflation falling?', battling inflation isn't just about raising interest rates; the real crux of the matter lies in 'trust' and 'expectations.'
Eğilmez emphasizes that inflation isn't merely about changing price tags, but also about the disruption of societal expectations. He points out that the mindset in Turkey of 'let's keep the economy alive, inflation will fall later' is a significant misstep. The economist asserts that once expectations are shattered, it becomes much more challenging to halt the rise in prices.
A reminder of the 2001 crisis.
In economies like Turkey, where production is dependent on imported inputs, the exchange rate directly creates cost inflation. Eğilmez reminds us that an increase in exchange rates triggers raw material prices, which in turn reflects on the final product. However, he also warns that a policy of high interest rates and low exchange rates cannot be sustained for long; this situation could weaken export power and increase the current account deficit.
Mahfi Eğilmez, recalling the success after the 2001 crisis, stated that the success of that period came not only with monetary policy, but also with structural steps such as banking reform and the EU process. Today, however, for interest rate hikes to be effective, it is necessary to take confidence-inspiring steps such as the rule of law, merit, and the independence of institutions. According to Eğilmez, if the public and investors are not convinced about the future, the dream of bringing inflation down to single digits will remain just that - a dream.
Mahfi Eğilmez concluded his remarks with the following statements:
'Even if we manage to reduce inflation for a while, we cannot keep it permanently low. The reason for this has been stuck at the same point for years: the inability to correct expectations. The reason for that lies in the lack of trust in the announced program, and the reason for that lies in the failure to implement structural reforms, especially the legal system, or even the further deterioration of existing ones. When trust weakens, expectations are disrupted, and when expectations are disrupted, inflation starts to rise again.'
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