From Income Inequality to Inflation: A Different Angle Worth of Looking

It is very simple to say that we are facing tough times dealing with inflation as a whole country (I mean Turkey, of course). If you are thinking that this problem popped out suddenly, you’re mistaken. It was always there but diluted with other social problems. There is always a turning point for igniting the fire inside us to question the root of the matter. And I think that we are on the edge.

 

Are we living a better life now? Or, are we mixing the things that comes along with the technological revolution (increase in accessibility level of internet, development of electronic devices, etc.) with the things that must carry us towards being a better nation among the others?

What I understand from the tables I’ve got from Turkish Statistical Institute (TUIK), World Bank (WB), Organization for Economic Co-operation and Development (OECD) and International Monetary Fund (IMF) that our wealth distribution is not getting better compared to 2010. We are almost at the same place where we were in 2006. I based my argument on Gini coefficient which means quoting WB: “Gini index measures the extent to which the distribution of income (or, in some cases, consumption expenditure) among individuals or households within an economy deviates from a perfectly equal distribution. Gini index of 0 represents perfect equality, while an index of 100 implies perfect inequality.” That inference takes me to the point where I need to look deeper according to the data published by TUIK and WB.

Gini index of WB and TUIK started to differ in 2010 and the gap continued to widen in 2014 as we can trace from the 2 tables below. Also the trend between the periods of 2010-2014 doesn’t look like the same. The directions are opposite. Are we deceived in one or another way from one of the 2 organizations or did one of them made a methodological change in their calculation?

 

From the data of distribution of annual household disposable income I have the chance to collect some evidence supporting my theory of not reaching to a better point as a nation. Below you will see two pie charts, one from 2006 and one from 2016. I want you to think about the consequences afterwards. Does it mean that we are in a good situation for a country according to Gini coefficient levels if we are not making any progress? The richest 20% is continue to sustain its share from the total annual disposable household income. In terms of growth each quintile has almost the same performance throughout the years. That preoccupies my thoughts about bowing to the inevitable: The concept of social state isn’t working.

 

 

After these income distribution information I need to explain the link between disposable income and inflation. The basket and the weights of items in it are very important for calculating the consumer price index (CPI) or as we all call it “inflation”. This basket must reflect the needs of an ordinary citizen because in a normally distributed household income diagram, ultra-rich and ultra-poor people will be outliers.

 

 

Before digging deep to this basket, we must also know our place among other countries in the world. According to OECD “Consumer prices - all items” data our annual percentage increase in CPI level is the highest among 35 OECD countries in 2016. This rank can be compared with IMF WEO data which states that Turkey is the 30^th highest country according to the average consumer price index percentage change. But you must also consider that IMF’s data covers 190 countries and the highest inflation (Rank #1 in 2016) level belongs to South Sudan in which civil war that began in December 2013, continued in 2016 despite a peace agreement signed in August 2015.

 

Marching with slower pace against the CPI data which is highly correlated to PPI (Producer Price Index) I need to inform you about what will happen sooner or later. In the line chart below we can clearly figure out that PPI fluctuation is much higher than CPI and they are almost always affected in the same direction. That means an increase in PPI level will eventually affect CPI levels because of the goods we consume. In my opinion what could be preventing that from happening can be 2 different strategies: 1) subventions like VAT (furniture, white goods, etc.), 2) reducing importation tax, allowing traders to import goods from abroad.

  

Aforementioned strategies will help to slow down CPI levels a little, but each of them alone are not sustainable in long term. Subventions are going to be a burden for a state and can change the consumer habits if they are applied for a long period. Subventions can prevent the state of getting higher tax income if they are not related directly to export production. Otherwise it could compensate the loss generated by subventions by bringing foreign exchange and balancing the balance of payments. Continuing or periodic subventions keep one's hand in taking advantage of this concept. It could also create expectation and hinder consumers to purchase something at regular times.

Reduction on importation tax can lead a country to lose its industrial power in long term. Without domestic production a country could lose its place in international trade of goods and services platform. Looking forward it could lead a nation to laziness and foolishness. And that will eventually decrease the need for qualified person, increase the rate of unemployment and trigger brain migration.

Now we can move on to inflation basket case. On the table below you can analyze main group list for CPI basket. There are adjustments in weight of each group made by TUIK at the beginning of every year. In my opinion it could mean two things:

1) If your country is exposed to currency risk and doesn’t have any energy reserve, meaning obliged to import it, what could be the best move to reduce the effect of sudden and unpredicted FX rate increase? What could be the solution for a country which tries to widen its tax revenue by implementing it to necessity goods? I will ease your time to think and answer by giving you a small tip. You can rearrange the weights of each item subjected to CPI basket. In that way, you won’t experience CPI level to raise like PPI and don’t need to make any dramatic interest rate hike.

Inflation and interest rates do have a spiral effect on each other and it could be prevented by maintaining price stability. Distorting or concealing data might seem easier to reach a quick result but a country, which chooses hard way to raise its level of wealth and prosperity to the level of developed countries, must stand tall and imply its strategy to carry itself to the future. With steady production, more technology based (more value added) products and higher export level, our country can reach desired welfare level in coming years.

2) If I am wrong and there is a good reason for Turkish public institutions to make adjustments for each data differentiating from worldwide organizations, they must also consult to worldwide accepted organizations to make those changes in order to align and not to spoil investors’ appetite for our country. We are not the only country trying to lure investors, and comparisons are made for each country before taking a huge step towards direct/indirect investment.