Inflation dropped to 61.78 pct and interest rate is 50 pct

Inflation dropped to 61.78 pct and interest rate is 50 pct

I am one super happy man if the fixed deposit could give me 10 percent per annum. My money would double in 7 years! It is well below this wish for double digits though. I have to be grateful. There is one country where the interest rate is 50 percent. Of course, it’s inflation is higher and the reason why interest rate is so high is to keep the inflation at bay. It seems to be working. This country is Türkiye. The reason for a high inflation is because of price increase in education, housing and hotel prices.

Article in dailysabah.com Annual inflation in Türkiye registered a sharp drop in July. It is a sustained slide gathered pace, while education, housing and hotel prices continued to surge.

The consumer price index (CPI) eased to 61.78% last month, just below expectations, according to data from the Turkish Statistical Institute (TurkStat).

It marks the steepest drop in nearly two years and the second consecutive fall after inflation eased to 71.6% in June from the cyclical peak of 75.4% in May.

The annual inflation drop had been expected, mainly due to base effects. Officials and the central bank had earlier signaled they anticipated a temporary uptick in the monthly readings due to adjustments in administered prices.

The bank kept borrowing costs unchanged at 50% for a fourth consecutive month in July. Article in dailysabah.com

What happens with a high inflation?

Purchasing power drops. The higher the price, the lower the purchasing power of the people because prices could rise overnight but salary could not. So, if we earn almost the same and prices are rising faster, we will soon find that we could afford ever fewer things every passing month unless we could somehow increase our income or the inflation could be tamed somehow.

Lower income consumers will suffer. Usually, when the prices rise, people with higher income would be affected less. However those with lower income will find it harder to buy things and since the ones with higher income could still afford, goods will be sold to the ones who could pay higher until supply increases to cancel out the demand induced price increase.

High inflation will usually also increase the interest rate. The reason is because the government of the day and even the central banks may want to keep inflation in check. When the rates are increased, more people will put their money in the bank and this will reduce the money supply which meant that demand for goods may fall and this should help to cool down the demand.

We do need some inflation yeah, we just do not want a high number

With a small rise in price, it will help to push for production of more goods and services which will in turn create more jobs and in turn would meant more people have salaries to buy more things. This feeds itself and this is why the economic multiplier could be 4 times. Imagine is price stays exactly the same, there are no incentive to produce more, thus creating no new jobs and thus no one has more salaries to buy things. Of course this is a super simpified way to explain inflation effects but I think you get the picture. We need some but we do not want a high number.

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