Will Şimşek be able to break the resistance of the firms?

While large segments of society, apart from a small minority, have been struggling to make ends meet under the shadow of a long period of high inflation, inflation has often been explained with simple arguments. The most prominent among these was the 'demand inflation' thesis.

Digging on this a little further, we found that the approach that implies that wage increases push inflation is the essence of the disinflation policy pursued by the economic administration (which can be summarized as the Şimşek program).

In fact, this is precisely why there was no second hike in the minimum wage this year. And it is precisely for this reason that instead of compensating for real wage losses in December, wage increases in line with 'expected' inflation are on the agenda. In other words, the first pillar of the Şimşek program was to contain inflation by suppressing real wages.

The second pillar is to control inflation by appreciating the Turkish lira in real terms. This is why high interest rates are used to attract foreign investment. The idea that the appreciation of the lira, thanks to the exchange rate guarantee given to foreigners (can be regarded as profit), may make it easier for sectors that determine their costs in foreign currency to control price increases, reflects what the economic administration has in mind.

Despite this policy since June 2023, the inflation data released last week showed that monthly inflation is still close to 3 percent. In other words, inflation continues to rise while real wages are suppressed and the lira is almost fixed. Thus, it is almost certain that the Central Bank's 2024 target will not be met. In other words, the two pillars on which the Şimşek program rested have collapsed.

However, the answer to the question of why inflation has not fallen is hidden not only in demand dynamics but also in production relations and the control of large firms over the market. In this column, I would like to point to the “elephant in the room” that is commonly ignored when discussing current inflation dynamics, namely the price-setting power of large firms. I argue that we cannot answer the question of what are the current dynamics of inflation in the current conjuncture without ignoring the resistance of large firms to the economic administration's disinflation program by using their price-setting power.

Market dominance

In Turkey, large firms have the power to set prices, especially in critical sectors, thanks to their monopolistic or oligopolistic position in the market. This creates a market environment with limited competition and allows firms to increase prices in line with their profit maximization objectives.

In fact, the almost constant exchange rate and the fact that the minimum wage has not been increased for a long time enable these firms to keep their costs low, while their market dominance allows them to continue raising prices. The faster increase in the consumer price index compared to the producer price index is another indicator of this mechanism of exploitation.

Decreasing costs

Low international energy and commodity prices allow capital owners to reduce their costs and gain a competitive advantage. In this case, price increases could have been expected to be contained. Indeed, both the slowdown in China's growth rate and the recession in Europe have resulted in lower prices for many commodities.

In terms of costs, we should add the favorable developments in energy and commodity prices, the start of interest rate cuts in the U.S. and the weakening of the dollar relative to other currencies. Therefore, there is a significant decline in financing costs.

However, large firms use this conjuncture to their advantage and continue to raise prices. For example, the decline in energy costs should prevent price hikes in energy-intensive sectors, but firms are triggering inflation by increasing their prices. This situation reveals how firms' pricing behavior based on these profitability strategies exacerbates inflationary pressures.

State-capital relations and inflation

The most common approach to discussing the relationship between the state and capital in Turkey is the 'strong state thesis'. I can summarize this approach in a few sentences as follows: The state's interventions in the economy prevent capital from making long-term investments, which has always caused the bourgeoisie as a class to remain passive in the face of the state. As a result, 'real capitalism' cannot emerge, which is the main reason for the weaknesses in democracy.

Discussing this thesis is beyond the scope of this column. However, let me at least say the following: In Turkey, capital is the perpetrator, not the victim, and at every critical juncture, the interests of large capital groups have been influential in determining the country's economic policies. What can we see if we apply this discussion to current inflation dynamics?

The situation we face is as follows: The efforts of the Turkish economic administration to fight inflation are limited by the resistance of large firms. The price-setting power of big firms and their resistance to efforts to fight inflation by using this power reveals how strong the market dominance of big firms is. While the power of the Şimşek program is enough to suppress wages, it is not enough to break the inflationary resistance of the bosses.

Let me conclude by mentioning Treasury and Finance Minister Mehmet Şimşek's statements on inflation. Şimşek's statement that “reducing inflation will not only solve the problem of the cost of living but will also permanently increase the welfare of our citizens” is not correct. Because lower inflation does not mean lower prices. It means a decrease in the rate of price increase. Falling inflation does not solve the problem of wage erosion (cost of living) in the face of cumulatively rising prices. What would solve the problem of the cost of living is an increase in wages and incomes, which the current program (by suppressing demand and wages) does the opposite.

This does not mean that inflation will not fall forever. Inflation will continue to decline in the coming months, largely due to the base effect, and in all likelihood, two years after Şimşek takes over from previous minister Nureddin Nebati, inflation will only return to the levels of two years ago.

Assuming that the economic administration will not change its faulty assumptions and the attitude it has developed based on them, it will continue to try to reduce inflation by further cutting demand, that is, by further suppressing wages and by guaranteeing profits to finance capital. To return to the initial question, the fate of the Şimşek program is in the hands of the bosses.