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What Inflation Feels Like in Real Life: The Case of Turkey

inflation in turkey

Inflation can often feel like an issue that is very distant, spoken about only on the news and never actually touching your own life. However, for some it can have real, life altering consequences. Looking at Turkey as a shining example, this article explains what inflation really is and how it can affect your everyday life.

Around the world central banks are experiencing the effects of inflation, which has recently hit levels unseen in the past two decades.

The pandemic caused supply chain hurdles, extreme money printing and labour shortages, which saw prices skyrocket in various countries; 6.2% in the US, 4.2% in the UK, 4.5% in India, and 10.7% in Brazil. This has left economists pondering over what it could mean for the economy, markets and even the impact inflation could start to have on the gold price.

If the situation with inflation continues to get worse, what could it mean for the ordinary person?

By looking at Turkey’s current economic situation, we can get a better understanding of what inflation really is and the affect it has on people’s lives. Turkey is our standout country when it comes to inflation, as their inflation rate is one of the highest in the world – standing as a perfect example of what could happen to other countries if inflation increases.

But firstly, how does inflation work?

What inflation does to your money?

Most of us think that inflation simply means higher prices. However, in reality, everyone’s true inflation rate is different, because we all buy different products, use different services, and invest in different markets depending on our own financial situation.

Surprisingly, to some, inflation can even be good to certain groups of people:

  • Owners of land, real estate, or physical assets such as gold, these all tend to hold their value through inflationary periods.
  • Debtors, even more so if their debts carry fixed rates. In which, they might get a chance to repay their loans in a less valuable currency.

But unfortunately, inflation doesn’t have this positive effect on everyone. For a large group of people, increased inflation means that their salary is not going as far as it once did, unless they are lucky enough for their salaries to keep increasing as fast as inflation. However, this is not the case for most individuals.

Due to this, most workers on fixed-wage contracts will effectively see their salaries getting smaller and their purchasing power shrinking.

Within one year, gasoline prices rose 51% in the US, while used cars cost +26% more. Other things that were affected were meat and natural gas prices which increased drastically.

To summarise the impact of this, if your salary is not adjusted to inflation, it essentially erodes the average person’s purchasing power, making what you have today worth less tomorrow.

Countries like Venezuela have extreme levels of inflation, to the point where paper money is worthless. So much so, that artists make handbags out the country’s currency. With some people even using physical gold nuggets to pay for basic goods.

Turkey’s situation is not as dire, but it has recently gained media attention as the Turkish lira (their national currency), fell in a historic crash, becoming the world’s weakest currency. Highlighting how inflation is one of the underlying root causes of paper money losing value.

Does inflation weaken national currencies?

In short, yes. As already mentioned, inflation is a decrease in the purchasing power of paper money, caused by a rise in prices across the economy.

Essentially, rising inflation implies?too much paper money chasing too few goods:?a product you buy today is worth a certain amount of money, and 2 years later, the price for the same product increases, making the same amount of money worth less than before.

Inflation can also often be more clearly understood as your money losing its value: If you purchased your daily loaf of bread for £1 last year, and you now buy it for £1.50, your money has lost 50% of its value.

This is exactly what happened in Turkey: Inflation caused things such as fuel and basic household goods to increase dramatically in price, becoming suddenly much more expensive. As a result of higher inflation and other economic and political reasons, the Turkish Lira lost almost 40% if its value in a year.

This has left many ordinary Turks reconsidering every spend and purchase they make, turning their lives upside down.

Although, many economists say that the situation is not that bad yet, it’s quite possible that things will worsen.

How can inflation affect people’s lives?

Rising inflation, put simply, means you must pay more for the exact same goods and services. Although your income may stay the same on paper, your buying power goes down while your cost-of-living increases.

It is still important to remember that inflation does not affect everything in the same way.

For instance, gas prices could increase but your home drop in value. Which is what happened during the 2008 financial crisis: home prices fell nearly 20% and oil prices went up.

If the situation gets serious and a currency starts decreasing in value rapidly, people may consider getting rid of their national currency and turn to a more stable one, most likely the U.S. dollar.

This is what was seen to happen in Turkey.

As the situation in Turkey grew worse, the country began to gain unprecedented media attention, with reports showing that many people in Turkey were facing increased hardships as prices of food and other goods soared.

Concerned Turks have been sharing their feelings for how inflation has affected their daily lives:

  • A rapid rise in prices: The price of everyday purchases increased by 100% overnight for Turkish consumers! This was explained by a 59-year-old woman who makes a living selling clothes at Istanbul’s market.

“I had never experienced such a deplorable life. I go to sleep; I wake up and the prices have gone up. I bought a 5-liter can of (cooking) oil, it was 40 lira. I went back, it was 80 lira. We don’t deserve this as a nation,”? she said.

  • Salaries are losing value: Several people explained to international media that as soon as they got their salaries, they converted them into foreign currency to keep at least some of their wages’ value.

"I have asked for an advance on my monthly salary just to convert it into dollars so that I can maintain some sense of value in my earnings. It's nearly impossible to focus or talk about anything else at this point,"? said Emirhan Metin, 28, a lawyer in Istanbul.

The ongoing situation that the Turkish economy is currently experiencing shows that?a spiral of inflation and currency devaluation can really bring a population’s wealth to its knees.

Although, Turkey’s situation seems unlikely to happen in most European countries or the U.S., rising inflation has become a global concern in the past few years.

What other countries are facing a currency crisis?

The impact of currency crises cannot be underestimated, they can wreak serious havoc on financial markets and impact individuals and companies alike. Plus, the fact they are extremely hard to predict, meaning countries are unable to even attempt to prevent or hold them off.

Some of the biggest currency devaluations in history are:

  • The Venezuelan Bolivar:? in August 2018, the country’s government?announced a huge 95% devaluation of the currency.
  • The Zimbabwean dollar (ZWD): between September 2008 and February 2009, Zimbabwe's currency fell in value from 1,000 ZWD per U.S. dollar to 300 trillion.

Additionally, the recent collapse of the Turkish lira will not be forgotten as one the major global currency crises

Could other countries be facing a similar scenario?

“Yeah, course it can … With higher interest rates in the U.S., all these other countries that have debt in dollars will be hit, ”?Mark Mobius, founder of Mobius Capital Partners LLP, said, without specifying what countries could be affected.

What’s the bottom line?

More and more countries are currently facing different levels of inflation, disrupted mainly by supply chains and the detrimental impacts Covid-19 has had on the world.

Whilst inflation can be seen merely as an economic term describing a general increase in prices, it is in fact a powerful and unpredictable force that can make people’s lives spiral out of control.

As mentioned throughout, the situation in Turkey shows how inflation can rip away people’s salary rapidly and make the hard-earned money sitting in their banks worthless.

Analysts have predicted that this currency crisis could potentially spread to other countries as changes in the U.S. interest rates could end up having a severe impact on countries holding debt in U.S. dollars.

While inflation keeps raising prices and reducing our purchasing power, it is well known that some assets such as physical gold often retain and even gain value in times of inflation.

As an investor, you should be asking yourself: am I prepared for inflation? If not, it may now be a good time to add gold into your investment portfolio.

Copyright: olegdudko

Article Last Updated: Friday, December 10, 2021