Category: Essential Economics for Business 7e and 6e

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Rise in the cost of living
Part 2: UK Government response

As we saw in Part 1, households are seeing a rise in the cost of living, which is set to accelerate. Inflation in the year to January 2022, as measured by the Consumer Prices Index (CPI), was 5.5%, the highest rate for over 30 years, and it is expected to reach more than 7 per cent by April. This has put great pressure on household budgets, with wage rises for most people being below the rate of price inflation. The poor especially have been hard hit, with many struggling to meet soaring energy, food and transport prices and higher rents.

In Part 2 we look at the UK government’s response to the situation, a similar response to that in many other countries.

Effects on government finances

The Chancellor, Rishi Sunak, has stated that the government understands the pressures families are facing with the cost of living. However, rising interest rates mean that it will cost the Treasury considerably more to service the UK’s national debt of more than £2tn.

Interest payments on index-linked debt are calculated using an alternative measure of inflation, the retail prices index (RPI), which is running at 7.8%, considerably higher than anticipated in last October’s Budget. It is now projected that central government spending on debt interest this financial year will come in at around £69bn, some £11bn higher than the £58bn forecast in the October 2021 Budget and £27bn above the £42bn forecast in the March 2021 Budget.

In addition, it is expected that the latest rise in CPI will increase the chances of the Bank of England raising interest rates and thereby further increasing the costs of servicing national debt. If this is the outcome when its Monetary Policy Committee meets next month, then it would be the third successive time interest rates have been raised.

There is also concern that this, in addition to the direct effects of higher costs, will push more firms towards insolvency. It is argued that if government wanted to prevent this, it would need to cut business taxes in order to boost investment and productivity and to allow businesses to provide annual wage rises that are affordable.

Monetary policy

The Bank of England’s traditional response to rising inflation is to raise interest rates, which it has done this twice in the past few months. This means that people who have borrowed money could see their monthly payments go up, especially on mortgages tied to Bank Rate.

An aim of this policy is to make borrowing more expensive resulting in people spending less. As a result, they will buy fewer things, and prices will stop rising as fast. However, when inflation is caused by external forces, this might have a limited effect on prices and would put a further squeeze on household budgets.

Fiscal policy

Alternatively, the government might choose to cut taxes for consumers on items whose prices are rising quickly. It is taking some measures to reduce the impact of energy price rises. For example, the Treasury has announced that it would provide millions of households with up to £350 to help with their rising energy bills and in April the lowest-paid will see the National Living Wage rise by 6.6%, which is higher than the current inflation rate.

The chief economist of the British Chambers of Commerce has said that tightening monetary policy too quickly risks undermining confidence and the wider recovery, arguing that more needs to be done to limit the unprecedented rise in costs facing businesses, including financial support for those struggling with soaring energy bills and delaying April’s national insurance rise.

Conclusion

Rising inflation affects all our living standards. It a global issue with causes beyond government control.

Rising prices together with planned tax increases mean that real average take-home pay is likely to fall over the coming year. The extra energy costs and tax rises will force families to make savings elsewhere, meaning business revenues may fall, and the economic recovery could be negatively impacted.

However, it is those on low incomes that tend to find it hardest to cope with the rising cost of living. Those impacted the most will be faced with difficult decisions over the coming months as they try to cope with falling real incomes. With food price inflation expected to rise further, a likely rise in interest rates and a further increase in the energy price cap in October, these tough decisions are set to get harder for poorest households in the economy.

Articles

See articles in Part 1

Podcast

Questions

    These questions are based on the podcast.

  1. What elements are there in household energy prices? Which element has gone up most?
  2. What are the arguments for and against the government delaying the rise in the rate of national insurance by 1.25 percentage points?
  3. What can be done to help people on modest earnings who earn just too much to receive benefits?
  4. Are government loans to help people with higher bills a good idea?
  5. What are the advantages and disadvantages of removing VAT on domestic energy?
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Rise in the cost of living
Part 1: What are the distributional consequences?

Households are expected to see further rises in the cost of living after the annual inflation rate climbed for a 13th month to its highest point in almost 30 years. This will put further pressure on already stretched household budgets. The increase reflects a bounceback in demand for goods and services after lockdowns, when prices fell sharply. It also reflects the impact of supply-chain disruptions as Covid-19 hit factory production and global trade.

The biggest concern, however, is the impact it will have on those already hard-pressed families across the UK. According to official figures, prices are rising at similar rates for richer and poorer households. However, household income levels will determine personal experiences of inflation. Poorer households find it harder to cope than richer families as essentials, such as energy and food, form a larger proportion of their shopping basket than discretionary items. On average the lowest-income families spend twice as much proportionately on food and housing bills as the richest. So low-income households, if they are already spending mainly on essentials, will struggle to find where to cut back as prices rise.

Latest Inflation figures

Latest figures from the ONS show that the Consumer Prices Index (CPI) rose by 5.5% in the year to January 2022, with further increases in the rate expected over the next couple of months. In measuring inflation, the ONS takes a so-called ‘basket of goods, which is frequently updated to reflect changes in spending patterns. For example, in 2021, hand sanitiser and men’s loungewear bottoms were added, but sandwiches bought at work were removed.

Annual CPI inflation is announced each month, showing how much the weighted average of these prices has risen since the same date last year. The weighted average is expressed as an index, with the index set at 100 in the base year, which is currently 2015.

Consumers would not normally notice price rises from month to month. However, prices are now rising so quickly that it is clear for everyone to see. What is more, average pay is not keeping up. There are workers in a few sectors, such as lorry drivers, who are in high demand, and therefore their wages are rising faster than prices. But the majority of workers won’t see such increases in pay. In the 12 months to January, prices rose by 5.5% on average, but regular pay, excluding bonuses, on average rose by only 4.7%, meaning that they fell by 0.8% in real terms.

The Bank of England has warned that CPI inflation could rise to 7% this year and some economists are forecasting that it could be almost 8% in April.

Why are costs rising?

From the weekly food shop, to filling up cars, to heating our homes, the cost of living is rising sharply around the world. Global inflation is at its highest since 2008. Some of the reasons why include:

  • Rising energy and petrol prices
    Oil prices slumped at the start of the pandemic, but demand has rocketed back since, and oil prices have hit a seven-year high. The price of gas has also shot up, leaving people around the world with eye-watering central heating bills. Home energy bills in the UK are set to rise by 54% in April when Ofgem, the energy regulator, raises the price cap.
  • Goods shortages
    During the pandemic, prices of everyday consumer goods increased. Consumers spent more on household goods and home improvements because they were stuck at home, couldn’t go out to eat or go on holiday. Manufacturers in places such as Asia have struggled to keep up with the demand. This has led to shortages of materials such as plastic, concrete and steel, driving up prices. Timber cost as much as 80% more than usual in 2021 in the UK.
  • Shipping costs
    Global shipping companies have been overwhelmed by surging demand after the pandemic and have responded by raising shipping charges. Retailers are now having to pay a lot more to get goods into stores. These prices are now being passed on to consumers. Air freight fees have also increased, having been made worse by a lorry driver shortage in Europe.
  • Rising wages
    During the pandemic many people changed jobs, or even quit the workforce – a problem exacerbated in the UK by Brexit as many European workers returned to their home countries. Firms are now having problems recruiting staff such as drivers, food processors and restaurant waiters. This has resulted in companies putting up wages to attract and retain staff. Those extra costs to employers are again being passed on to consumers.
  • Extreme weather impact
    Extreme weather in many parts of the world has contributed to inflation. Global oil supplies took a hit from hurricanes which damaged US oil infrastructure. Fierce storms in Texas also worsened the problems in meeting the demand for microchips. The cost of coffee has also jumped after Brazil had a poor harvest following its most severe drought in almost a century.
  • Trade barriers
    More costly imports are also contributing to higher prices. New post-Brexit trading rules are estimated to have reduced imports from the EU to the UK by about a quarter in the first half of 2021. In the USA, import tariffs on Chinese goods have almost entirely been passed on to US customers in the form of higher prices. Chinese telecoms giant Huawei said last year that sanctions imposed on the company by the USA in 2019 were affecting US suppliers and global customers.
  • The end of pandemic support
    Governments are ending the support given to businesses during the pandemic. Public spending and borrowing increased across the world leading to tax rises. This has contributed to rises in the cost-of-living, while most people’s wages have lagged behind.

Main concerns for the UK inflation

With rapidly rising prices, the economic decisions people will have to make are much harder. The main concerns for UK households include increases in energy costs, food prices, rent and interest rates on borrowing. All of these concerns come at a time when the government prepares to increase national insurance contributions for workers in April. There has been some pressure from MPs to scrap the tax rise so as to ease the pressure on living costs. It can be argued that there are fairer ways to increase taxes than through national insurance. However, the plan is relatively progressive, and scrapping the rise could be a badly targeted way of helping the poorest households with their energy bills.

Energy Bills
Electricity and gas bills for a typical household are expected to increase on average by £693 a year in April, which, as we have seen, is a 54% increase. Around 18 million households on standard tariffs will see an average increase from £1277 to £1971 per year. And around 4.5 million prepayment customers will see an average increase of £708 – from £1309 to £2017. Energy bills won’t rise immediately for customers on fixed rates, but many are likely to see a significant increase when their deal ends.

Bills are going up because the energy price cap is being raised. The energy price cap is an example of a maximum price being imposed on the market; it is the maximum price suppliers in England, Wales and Scotland can charge households for their energy. Energy firms can increase bills by 54% when the new cap is introduced in April. The price cap is currently reviewed every 6 months and it is expected that that prices will rise again in October.

Energy price rises are likely to hit Britain’s poorest households the hardest as they spend proportionately more of their income on energy, a problem exacerbated by many living in poorly insulated homes. More people are thus expected to find themselves facing fuel poverty. This means that they spend a disproportionate amount of their income on energy and cannot afford to heat their homes adequately. According to the Resolution Foundation, the poorest will see their energy spend rise from 8.5% to 12% of their total household budget, three times the percentage for the richest.

The way fuel poverty is measured varies around the UK. In Scotland, a household is in fuel poverty if more than 10% of its income is spent on fuel and its remaining income isn’t enough to maintain an adequate standard of living. It is expected that the number of homes facing ‘fuel stress’ across the UK will treble to 6.3 million after April. It will, however, have the greatest impact on pensioners, people in local authority housing and low-income single-adult households who on average could be forced to spend over 50% of their income on gas and electricity. The Resolution Foundation thinktank has warned that UK households are facing a ‘cost of living catastrophe’.

Food
Low-income households also spend a larger proportion than average on food and will therefore be relatively more affected by increases in food prices. Food and non-alcoholic drink prices were up by 4.2% in the year to December 2021. The Monetary Policy Committee has stated that food price inflation is expected to increase in coming months, given higher input costs. It has been estimated by the thinktank, Food Foundation, that 4.7m Britons, equivalent to 8.8% of the population, are struggling to feed themselves and are regularly going a day without eating.

Supermarkets have also raised their concerns about future increases. Tesco’s chairman John Allan has predicted that the worst is yet to come, pointing to 5% as a likely figure for food price inflation by the spring. He cited high energy prices, both for Tesco and its suppliers, as a key factor behind the expected rise.

It has been observed that the Smart Price, Basics and Value range products offered by supermarkets as lower-cost alternatives are stealthily being extinguished from the shelves. This is leaving shoppers with no choice but to ‘level up’ to the supermarkets’ own better-quality branded goods – usually in smaller quantities at larger prices. The managing director of Iceland, Richard Walker, has stated that his stores are not losing customers to other competitors or to better offers, but to food banks and to hunger. This is a highly concerning statement given that 2.5m citizens were forced by an array of desperate circumstances to use food banks over the past year.

Rent
Private rents are also rising at their fastest rate in five years, intensifying the increase in the cost of living for millions of households. Data from the ONS reveal that the average cost of renting in the UK rose by 2% in 2021. This was the largest annual increase since 2017. The East Midlands had the biggest increase in average rental prices, with tenants paying 3.6% more than a year earlier. However, due to falling demand for city flats during lockdown, as people favoured working from home, London had the smallest increase at 0.1%. Nevertheless, as Covid restrictions are removed, renters, including office workers and students, are now returning back to cities. This is now pushing up rental prices with demand outpacing supply.

The property website Zoopla found newly advertised rental prices were rising much faster across the UK. It said the average rent jumped 8.3% in the final three months of 2021 to £969 a month. This increase in rental prices, combined with the general rise in prices will place additional pressure on the government to increase support for vulnerable families. The housing charity, Shelter, has reported an increase in people who are struggling to pay their rent and even pay their electricity. With Covid-era protections having ended, if people struggle to pay, they are faced with eviction or even homelessness. There are calls for the government to support such people by reversing welfare cuts.

Insurer, Legal & General, has announced an additional investment over the next 5 years of £2.5bn on its ‘build to rent’ schemes. The aim is to provide more than 7000 purpose-built rental homes in UK towns and cities. L&G claims that the additional homes are part of the solution to the rental problem, with rent increases being capped at 5% for five years. However, sceptics claim the company is simply trying to cash in on the booming market and there are calls for further government action. The Joseph Rowntree Foundation claim that renters will struggle as rents in some areas have risen as much as 8%. Despite this, housing benefit has been frozen for two years and therefore there are calls for government to urgently relink housing benefit to the real cost of renting.

Articles

Questions

  1. What other measures of inflation are used beside CPI inflation? How do they differ?
  2. If all consumers are facing approximately the same price increases for any given good or service, why are poor people being disproportionately hit by rising prices?
  3. For what reasons might the rate of inflation (a) rise further; (b) begin to fall?
  4. Examine a developed country other than the UK and find out how inflation is affecting its population. Is its experience similar to that in the UK? Does it differ in any way?
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End of the bull run?

With the onset of the pandemic in early 2020, stock markets around the world fell dramatically, with many indices falling by 30% or more. In the USA, the Dow Jones fell by 37% and the Nasdaq fell by 30%. In the UK, the FTSE 100 fell by 33% and the FTSE 250 by 41%.

But with a combination of large-scale government support for their economies, quantitative easing by central banks and returning confidence of investors, stock markets then made a sustained recovery and have continued to grow strongly since – until recently, that is.


With inflation well above target levels, central banks have ended quantitative easing (QE) or have indicated that they soon will. Interest rates are set to rise, if only slowly. The Bank of England raised Bank Rate from its historic low of 0.1% to 0.25% on 16 December 2021 and ceased QE, having reached its target of £895 billion of asset purchases. On 4 February 2022, it raised Bank Rate to 0.5%. The Fed has announced that it will gradually raise interest rates and will end QE in March 2022, and later in the year could begin selling some of the assets it has purchased (quantitative tightening). The ECB is not ending QE or raising interest rates for the time being, but is likely to do so later in the year.

At the same time economic growth is slowing, leading to fears of stagflation. Governments are likely to dampen growth further by tightening fiscal policy. In the UK, national insurance is set to rise by 1.25 percentage points in April.

The slowdown in growth may discourage central banks from tightening monetary policy more than very slightly. Indeed, in the light of its slowing economy, the Chinese central bank cut interest rates on 20 January 2022. Nevertheless, it is likely that the global trend will be towards tighter monetary policy.

The fears of slowing growth and tighter monetary and fiscal policy have led many stock market investors to predict an end to the rise in stock market prices – an end to the ‘bull run’. This belief was reinforced by growing tensions between Russia and NATO countries and fears (later proved right) that Russia might invade Ukraine with all the turmoil in the global economy that this would entail. Stock market prices have thus fallen.

The key question is what will investors believe. If they believe that share prices will continue to fall they are likely to sell. This has happened since early January, especially in the USA and especially with stocks in the high-tech sector – such stocks being heavily represented in the Nasdaq composite, a broad-based index that includes over 2500 of the equities listed on the Nasdaq stock exchange. From 3 January to 18 February the index fell from 15 833 to 13 548, a fall of 14.4%. But will this fall be seen as enough to reflect the current economic and financial climate. If so, it could fluctuate around this sort of level.

However, some may speculate that the fall has further to go – that indices are still too high to reflect the earning potential of companies – that the price–earnings ratio is still too high for most shares. If this is the majority view, share prices will indeed fall.

Others may feel that 14.4% is an overcorrection and that the economic climate is not as bleak as first thought and that the Omicron coronavirus variant, being relatively mild for most people, especially if ‘triple jabbed’, may do less economic damage than first feared. In this scenario, especially if the tensions over Ukraine are diffused, people are likely to buy shares while they are temporarily low.

But a lot of this is second-guessing what other people will do – known as a Keynesian beauty contest situation. If people believe others will buy, they will too and this will push share prices up. If they think others will sell, they will too and this will push share prices down. They will all desperately wish they had a crystal ball as they speculate how people will interpret what central banks, governments and other investors will do.

Articles

Questions

  1. What changes in real-world factors would drive investors to (a) buy (b) sell shares at the current time?
  2. How does quantitative easing affect share prices?
  3. What is meant by the price-earnings ratio of a share? Is it a good indicator as to the likely movement of that share’s price? Explain.
  4. What is meant by a Keynesian beauty contest? How is it relevant to the stock market?
  5. Distinguish between stabilising and destabilising speculation and illustrate each with a demand and supply diagram. Explain the concept of overshooting in this context.
  6. Which is more volatile, the FTSE 100 or the FTSE 250? Explain.
  7. Read the final article linked above. Were the article’s predictions about the Fed meeting on 26 January borne out? Comment.
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Inflationary growth, stagflation or recession? Looking ahead

Inflation across the world has been rising. This has been caused by a rise in aggregate demand as the global economy has ‘bounced back’ from the pandemic, while supply-chain disruptions and tight labour markets constrain the ability of aggregate supply to respond to the rise in demand.

But what of the coming months? Will supply become more able to respond to demand as supply-chain issues ease, allowing further economic growth and an easing of inflationary pressures?

Or will higher inflation and higher taxes dampen real demand and cause growth, or even output, to fall? Are we about to enter an era of ‘stagflation’, where economies experience rising inflation and economic stagnation? And will stagnation be made worse by central banks which raise interest rates to dampen the inflation but, in the process, dampen spending.

Despite the worries of central banks, with inflation being higher than forecast a few months ago, forecasts (e.g. the OECD’s) are still for inflation to peak fairly soon and then to fall back to around 2 to 3 per cent by the beginning of 2023 – close to central bank target rates.

In the UK, annual CPI inflation reached 5.4% in December 2021. The UK Treasury’s January 2022 new monthly forecasts for the UK economy by 15 independent institutions give an average forecast of 4.0% for CPI inflation for 2022. In the USA, annual consumer price inflation reached 7 per cent in December 2021, but is forecast to fall to just over the target rate of 2% by the end of 2022.

If central banks respond to the current high inflation by raising interest rates more than very slightly and by stopping quantitative easing (QE), or even engaging in quantitative tightening (selling assets purchased under previous QE schemes), there is a severe risk of a sharp slowdown in economic activity. Household budgets are already being squeezed by the higher prices, especially energy and food prices. And people will face higher taxes as governments seek to reduce their debts, which soared with the Covid support packages during the pandemic.

The Fed has signalled that it will end its bond buying (QE) programme in March 2022 and may well raise interest rates at the same time. Quantitative tightening may then follow. But although GDP growth is still strong in the USA, Fed policy and stretched household budgets could well see spending slow and growth fall. Stagflation is less likely in the USA than in the UK and many other countries, but there is still the danger of over-reaction by the Fed given the predicted fall in inflation.

But there are reasons to be confident that stagflation can be avoided. Supply-chain bottlenecks are likely to ease and are already showing signs of doing so, with manufacturing production recovering and hold-ups at docks easing. The danger may increasingly become one of demand being excessively dampened rather than supply being constrained. Under these circumstances, inflation could rapidly fall, as is being forecast.

Nevertheless, as Covid restrictions ease, the hospitality and leisure sector is likely to see a resurgence in demand, despite stagnant or falling real disposable incomes, and here there are supply constraints in the form of staffing shortages. This could well lead to higher wages and prices in the sector, but probably not enough to prevent the fall in inflation.

Articles

Data

Questions

  1. Under what circumstances would stagflation be (a) more likely; (b) less likely?
  2. Find out the causes of stagflation in the early/mid-1970s.
  3. Argue the case for and against the Fed raising interest rates and ending its asset buying programme.
  4. Why are labour shortages likely to be higher in the UK than in many other countries?
  5. Research what is likely to happen to fuel prices over the next two years. How is this likely to impact on inflation and economic growth?
  6. Is the rise in prices likely to increase or decrease real wage inequality? Explain.
  7. Distinguish between cost-push and demand-pull inflation. Which of the two is more likely to result in stagflation?
  8. Why are inflationary expectations a major determinant of actual inflation? What influences inflationary expectations?
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Inflation in Turkey: a self-inflicted problem?

Inflation has been rising around the world as a combination of a recovery in demand and supply-chain issues have resulted in aggregate demand exceeding aggregate supply. Annual consumer price inflation at the beginning of 2022 is around 2.5% in China, 3.5% in Sweden, 5% in the eurozone, Canada and India, 6% in the UK and South Africa, 7% in the USA and 7.5% in Mexico. In each case it is forecast to go a little higher before falling back again.

Inflation in Turkey

In Turkey inflation is much higher. The official annual rate of consumer price inflation in December 2021 was 36.1%, sharply up from 21.3% in November. But according to Turkey’s influential ENAGrup the December rate was much higher still at 82.8%. Official producer price inflation was 79.9% and this will feed through into official consumer price inflation in the coming weeks.

The rise in inflation has hit the poor particularly badly. According to the official statistics, in the year to December 2021, domestic energy prices increased by 34.2%, food by 44.7% and transport by 53.7%. In response, the government has raised the minimum wage by nearly 50% for 2022.

Causes of high and rising inflation

Why is Turkey’s inflation so much higher than in most developed and emerging economies and why has it risen so rapidly? The answer is that aggregate demand has been excessively boosted – well ahead of the ability of supply to respond. This has driven inflation expectations.

Turkey’s leader, President Erdoğan, in recent years has been seeking to stimulate economic growth through a mixture of supply-side, fiscal and monetary policies. He has hoped that the prospect of high growth would encourage both domestic and inward investment and that this would indeed drive the high growth he seeks. To encourage investment he has sought to reduce the reliance on imports through various measures, such as public procurement favouring domestic firms, tax reliefs for business and keeping interest rates down. He has claimed that the policy is focused on investment, production, employment and exports, instead of the ‘vicious circle of high interest rates and low exchange rates’.

With the pandemic, fiscal policy was largely focused on health, social security and employment measures. Such support was aided by a relatively healthy public finances. General government debt was 32% of GDP in 2020. This compares with 74% for the EU and 102% for the G7. Nevertheless, the worsening budget deficit has made future large-scale expenditure on public infrastructure, tax cuts for private business and other supply-side measures more difficult. Support for growth has thus fallen increasingly to monetary policy.

The Turkish central bank is not independent, with the President firing senior officials with whom he disagrees over monetary policy. The same applies to the Finance Ministry, with independently-minded ministers losing their jobs. Monetary and exchange rate policy have thus become the policy of the President. And it is here that a major part of the current problem of rising inflation lies.

Monetary and exchange rate policy

Despite rising inflation, the central bank has reduced interest rates. At its monthly meeting in September 2021, the Turkish central bank reduced its key rate from 19% to 18% and then to 16% in October, to 15% in November and 14% in December. These unprecedented rate cuts saw a large increase in the money supply. M1 rose by 11.7% in November alone; the annual growth rate was 59.5%. Broad money (M2 and M3) similarly rose. M3 grew by an annual rate of 51% in November 2021. The cut in interest rates and rise in money supply led to a rise in nominal expenditure which, in turn, led to higher prices.


The cut in interest rates and rise in nominal aggregate demand led to a large depreciation in the exchange rate. On 1 September 2021, 100 Turkish lira exchanged for $12.05. By 11 January 2022 the rate had fallen to $7.22 – a 40.1% depreciation. This depreciation, in turn, further stoked inflation as the lower exchange rate pushed up the price of imported goods. (Click here for a PowerPoint of the chart.)

Attempts were made to stem this fall in the lira on 20 December, by which point 100 lira were trading for just $5.50 (see chart) and speculation against the lira was gathering momentum. President Erdoğan announced a scheme to protect lira deposits against currency volatility, guaranteeing lira deposits in hard currency terms. The mechanism adopted was a rise in the interest rate on lira deposits with a maturity of 3 to 12 months, thereby encouraging people to lock in deposits for the medium term and not, therefore, to use them to speculate against the lira by buying other currencies. Other interest rates would be unaffected. At the same time the central bank used foreign currency reserves to engage in large-scale purchases of the lira on the foreign exchange market.

The lira rallied. By 23 December, 100 lira were trading for $8.79. But then selling of the lira began again and, as stated above, by early January 100 lira had fallen to $7.22. The underlying problem of excess demand and high inflationary expectations had not been solved.

It remains to be seen whether the President will change his mind and decide that the central bank needs to raise interest rates to reduce inflation and restore confidence.

Videos

Articles

Data

Questions

  1. Until the pandemic, the Turkish economy could be seen as a success story. Why?
  2. What supply-side policies did Turkey pursue?
  3. Use either an aggregate demand and supply diagram or a dynamic aggregate demand and supply (DAD/DAS) diagram to explain what has happened to inflation in Turkey in the past few months.
  4. Explain the thinking behind the successive cuts in interest rates since September 2021.
  5. Why did the measures introduced on 20 December 2021 only temporarily halt the depreciation of the lira?
  6. Choose a country with a higher rate of inflation than Turkey (see second data link above). Find out the causes of its high rate. Are they similar to those in Turkey?