The high inflation phenomenon, with which we have been living
together in Turkey for the last 15 years, has created a confusion
of concepts in addition to the subsequent economical and ethical
disadvantages that it has caused.
It is the result of this confusion that the terms "high cost
of living" and inflation are used interchangeably. The cost
of living may be high even at zero inflation rate. If the productivity
of the society is low, the income will accordingly be low; and
this will cause the purchasing power of the individuals to be
low. This is what we call "high cost of living", and
is a relative phenomenon. "Cost of living " may be high
for some people or groups but it may not be so for people with
high income.
The confusion between financial straits and high cost of living
is indicative of this conceptual chaos.
The way of living and/or life expectancy of a person with high
productivity, thus with high income, may result in financial bottlenecks
for him. It is a rather common phenomenon that a person who is
problematic in his consumption ethics has financial bottlenecks.
However, it is a fact that, whatever its source is, inflation
weakens the purchasing power of all groups of people, whether
they have high or low income; whether they are economizers or
spendthrifts; whether they have high expectations or are decent
people.
In case of inflation caused by conjunctures, these groups of people can overcome this temporary condition by cutting off their luxuries, by working more or by (and generally besides ) trying to economize more. What's more, it is not difficult to estimate that people will put away their savings when the conditions get better , and hence, will be prepared for 'hard times'.
Because such types of high inflation follow the fluctuations in
'business cycle', every dip will necessarily followed by a peak,
by definition. On the contrary, a long period high inflation -
which we can call chronic inflation - is completely different
from the former, which we can call cyclic inflation.
In Turkey, both kinds of inflation have existed side by side for
the last 15 years. Cyclic inflation has been fluctuating according
to its own parameters, and chronic inflation continues to exist
at an almost constant level. The resultant inflation at any time,
on the other hand, is the summation of these two types of inflation.
The main cause of cyclic inflation can easily be explained in
terms of the business cycle concept. At a specific balance between
demand, supply, wages and prices, making new investments cause
an increase in the purchasing power; and the increased purchasing
power in turn increases the demand for goods and services. Since
suppply is constant, the prices increase and this in turn decreases
the demand, causing stagnation. The inflation during the periods
when prices increase is the type of inflation which we name as
cyclic inflation above.
On the other hand, chronic inflation arises due to a number of
reasons different from the above; and it influences the reasons
that cause it to arise, thus, further increasing the rate of inflation.
In other words, a spiral phenomenon is created. There are some
preventive factors that stop the continuation of this spiral into
infinity; and in case these factors are weakened and/or the factors
creating the inflation are strengthened, the phenomenon which
is called 'hyper inflation' arises.
The reasons creating chronic inflation can be grouped as follows:
Under the first group, there are various causes : mainly a high
rate of increase in population; not being able to catch up with
technological development; inadequate consumption ethics; productivity
which is not able to follow the desire to increase living standards;
inflation exportation (by products such as petroleum); corruption
in the cadres in public institutions and offices against unemployment;
budget deficit in Public Financial Institutions; public expenditures
consisting of items such as infrastructure investments; and similar
causes.
If every cause is separated into sub-causes, finally we will be
able to reach the original causes, which are the 'roots 'of the
others. This first group of causes are those which are stated
in public opinion , albeit individually. Meanwhile, the point
to be criticized here is that a 'programme' (package) consisting
of the solutions put forward integrally to tackle these causes
have not been defined and, hence, have not been applied in determination.
The second group of causes is the 'snowball effect' which has
not been underlined, let alone underlining, has been denied to
exist, up to now. In other words, the effect of a price increase
to re-inse itself !… The reason why this effect is denied
is the fact that a research which will make people realise its
dimensions has not been conducted in Turkey.
The first study that can give an opinion on the potential dimensions
of this impact was done and published in 1990.* Analysis
made on a hypothetical Input/Output table demonstrated that this
impact, which has been supposed as 'negligible' up to now, is
in fact very important.
A set consisting of 10 products thought to represent basic goods
and services on the market has been defined and some weights have
been appointed for the products in this set. In the first trial,
made without taking the snowball effect into account, a 10% increase
in price has been tried and an inflation rate has been calculated
using the mentioned set. This rate was found to be 5%. In other
words, the price increase on petroleum has increased the general
level of prices by 5%. Naturally, it must not be forgotten that
this rate depends on the dependencies of the products on each
other, and these dependencies are variable.
In the second trial, the snowball effect has been taken into
account (and this is the real situation), and it has been seen
that a 10% increase in petroleum price increases the general
level of the prices by 15%. Hence, the snowball effect multiplies
the price increases by three.** And, it is this fact
that can not be estimated beforehand.
How to make use of the model
Those who involved in the management of economics need a simulator
that can produce detailed information on the sensitivity of the
I/O table to various changes.
As long as the answers to the questions, " Which goods or
service products are sensitive to increases in price? How sensitive
are they?" are not known, a 'snowball' phenomenon can start
as a result of unexpected reasons. Such a model can be used for
a general purpose of this kind.
On the other hand, it is natural that in the real I/O system that
makes up the economy, some products are 'more effective' and/or
'less sensitive' than others. A product which is the input for
a high number of products will be 'more effective' while a product
which uses a high number of products as input will be 'more sensitive'.
These two groups can collectively be called as 'Critical Products'.
A portion of the 'Critical Products' are known: for example,
products such as petroleum, electricity, labourer's wages…
However, it is impossible to know all the critical products fully
without carrying out detailed analysis on the I/O table. It is
impossible to comprehend fully the possible consequences of increasing
some unremarkable inputs( such as taxes, duty fees, tolls ) on
the cost of critical products, even if in small amounts, without
making the necessary analysis on the I/O table.
The most interesting result of the model is the phenomenon of
price discount. The avalanche impact caused by the increases in
prices may similarly arise as a result of a price discount. Below
are given the Snowball Effect Multipliers caused by 10%
price increase and 10% price discount on various products:
% CHANGES IN THE GENERAL LEVEL OF PRICES IN CASE OF 10% INCREASE AND DISCOUNT FOR EACH PRODUCT
product no. product name 10% price 10% price
increase discount
1 petroleum 15.0 -18.0
2 electricity 9.7 -11.0
3 labourers' wages 16.5 -21.8
4 transportation 8.1 -9.3
5 iron-steel 1.1 -1.15
6 rent 13.3 -17.1
7 newspaper 1.2 -1.25
8 water 6.1 -6.3
9 land 0 0
10 bread 6.8
-7.5
The fact that some critical products give rise to a price discount
in the general level of prices larger than the discount made in
the product can be used as a very effective tool in the combat
with inflation, if this discount can be carried out.
Conclusion
One of the reasons of the inflation in our country -but an important
one- is the 'price increase spiral' examined here. This
inflation is similar to the periodic inflation caused by the business
cycle in economies which are relatively closer to Full
Competition only in the name.
Price changes in a number of Critical Products, which
will be determined by this method of analysis, which should be
placed in the first rank among the tools to be utilized in combatting
inflation and must be closely followed; and interventions to stop
the snowball effect must be carried out when necessary, without
disturbing the principles of the free market economy.
There is no doubt that new visions in The Combat with Inflation,
will undoubtedly be placed among the first ranks in the agenda
of the new government.
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