Last updated on September 4th, 2024 at 11:43 am
How does the inflation rate, which we often hear about in daily life, affect our lives? Have you ever thought about what causes the change in prices? In simple terms, inflation is the general increase in prices. It causes the value of our money to decrease and our purchasing power to fall. To understand it better, we need to look at it in depth.
As Remitly, in this article, we have researched what is curious about inflation in Turkey. We recommend you to read the rest of our article to learn the definition, types, calculation and its effects on the economy.
What is Inflation?
Inflation is an economic phenomenon that occurs when the value of goods and services sold across the country increases over a given period. Inflation is not just a price increase in a certain group of goods or services; it means a continuous increase in the general level of prices in the country.
Types of Inflation
The economy can change according to the dynamics of countries. According to these changes, inflation can occur on various scales. Inflation is divided into two groups: according to the price level and according to its causes.
Types of Inflation
The economy can change according to the dynamics of countries. According to these changes, inflation can occur on various scales. Inflation is divided into two groups: according to the price level and according to its causes.
Types of Inflation by Price Level
- High Inflation: A type of inflation in which price increases are high and at unacceptable levels.
- Moderate Inflation: A type of inflation in which price increases are low and at acceptable levels. It does not affect domestic and foreign trade balances.
- Hyperinflation: A type of hyperinflation in which price increases are very high and out of control.
Types of Inflation According to Causes
- Demand Inflation: It is the type of inflation that occurs when the total demand of consumers exceeds the available supply of producers.
- Cost (Supply) Inflation: It is the type of inflation that occurs when increases in production costs are directly reflected in prices.
- Structural Inflation: It is the type of inflation caused by structural problems in the economy (e.g. population growth, migration, etc.).
Unusual changes in a country’s economy may result in different types of inflation than those listed above. Types of inflation that arise in different situations:
- Deflation: The opposite of inflation, it means a fall in all prices over a certain period of time. Although the fall in prices and thus inflation may seem positive at first glance, it has negative effects on the country’s economy in the long run.
- Stagflation: It occurs when a high inflation rate and stagnation occur at the same time in an economy. In other words, stagflation is a special situation in which high unemployment, low production and excessive price increases are seen together.
How is the Inflation Rate Calculated?
The inflation rate in Turkey is calculated and published monthly by the Turkish Statistical Institute (TurkStat). In order to calculate inflation, we need to know the concepts of CPI, D-PPI, and WPI.
- Consumer Price Index (CPI): The CPI measures the change in prices of final goods purchased by consumers. TURKSTAT conducts a consumption survey covering all social and economic segments of society and creates an average consumption basket. The products in this basket are weighted according to consumers’ expenditures. The CPI is then calculated by tracking the prices of these products.
- Domestic Producer Price Index (D-PPI): The D-PPI measures the change in producer prices of domestically produced and sold products. It is considered an earlier indicator than the CPI.
- Wholesale Price Index (WPI): WPI was used to express changes in the wholesale prices of raw materials and semi-finished products used in production. The terms WPI and PPI have been changed to D-PPI since 2014.
Inflation is calculated as follows:
- In order to calculate price changes, TurkStat constructs a consumer basket based on the goods and services purchased by an average consumer family.
- Each product in the basket is assigned a weight according to consumer expenditures.
- The prices of the products in the basket are checked monthly and multiplied by the predetermined weight in the basket. This is how the CPI is calculated.
- Monthly inflation and annual inflation rates are calculated as the difference of the CPI index values for the relevant period.
Why Does Inflation Increase?
Inflation is affected by the dynamics of a country’s economy. Many factors can cause it to increase or affect its rate of increase. To express the factors that cause it to increase in general:
- An increase in the quantity of money put on the market increases consumers’ demand for goods and services. The excess of demand over supply causes prices to rise. An increase in prices leads to an increase in inflation.
- Increasing costs such as energy, raw materials and labor directly increases production costs. Increased costs cause prices to rise.
- When production is lower than demand, higher prices may be demanded to access goods and services.
- Major events such as natural disasters, pandemics and wars that shake the national economy can cause inflation to increase.
How to Reduce Inflation?
Inflation tends to increase in general, but there are practices that slow down this increase, i.e. disinflation. To put it in general terms:
- The Central Bank may tighten monetary policy by raising interest rates. Consumers may prefer saving instead of buying goods and services with high borrowing.
- The Central Bank may reduce the demand pressure of consumers by reducing the money supply to the market.
- Governments can formulate budget policies by reducing public expenditures and raising taxes.
- Production costs can be kept under control by controlling energy and raw material prices.
- Exchange rate policies can stabilize exchange rates. This can help keep import costs under control.
- Fiscal reforms and long-term economic policies can reduce inflation and stabilize the economy.
More Information: Exchange Rates 101: Get Answers to 12 Common Questions, Rare Currencies in Turkey
Effects of Inflation
High inflation will have a negative impact on the national economy and reduce the purchasing power of individuals. Let’s take a look at the negative effects of inflation:
- Declining purchasing power
- Depreciation of savings
- Rising interest rates
- Creation of fiscal imbalances
- Investment decisions become more difficult
- Inequality in income distribution
Inflation Rate 2024
Annual inflation rates in Turkey are based on July data released by TurkStat:
- The CPI-adjusted inflation rate was calculated as 61.78%.
- The highest inflation rate was 104.50% in education.
- The rate linked to housing prices was 98.48%.
- The rate for the restaurants and hotels sector was 76.04%.
Current inflation rates can be followed on the website of the Turkish Statistical Institute (TurkStat ).
Frequently Asked Questions
Is WPI or CPI Higher?
WPI is now referred to as D-PPI. According to TURKSTAT statistics, D-PPI (former WPI) is lower than CPI.
What is included in the Inflation Basket?
The inflation basket is determined by TurkStat according to consumers’ spending tendencies. It usually includes basic necessities.
When Will Inflation Be Announced?
Monthly inflation rates are usually announced by TurkStat in the first week of the following month.
How is the 12-Month Average Inflation Calculated?
Inflation rates are calculated monthly by TurkStat. 12-month average inflation rate is calculated by taking the average of the inflation rates for the last 12 months.
How to Calculate the 6-Month Inflation Differential?
The inflation differential is particularly important for wage earners’ requests for a raise. It is calculated by subtracting the last period’s inflation from the previous period’s inflation.
