Will prices plummet in Turkey along with the dollar?

We are going through an era of intensifying global inflationary pressure. We also have seen that repercussions, especially those stemming from the exchange rate, were speedily reflected in prices in Turkey. However, since the beginning of last week, the dollar lost almost 45% of its value against the Turkish lira, as the exchange rate plummeted from 18.30 to below 11 liras. But will rapidly rising prices fall at the same rate?

The empirical findings of economic studies have shown that firms’ responses to price fluctuations are asymmetrical. In other words, if the movement in prices is trending upwards, prices are quick to reflect that increase, while it tends to usually be slower for downward movements. In economic literature, we call this phenomenon “price stickiness.”

In sectors where input costs are determined by foreign currency, price hikes made when the exchange rate goes up, do not go down at the same rate when it starts to decrease, causing a situation that reduces the efficacy of the fight against inflation. 

Of course, the fact that the increase in the Domestic Producer Price Index (D-PPI) is higher than the Consumer Price Index (CPI) also carries an impact. Hence, it is normal for markdowns to be delayed in certain sectors. So, can the situation create an excuse for opportunism in some sectors and product groups?

Let me start by answering the question in this paragraph: No way. Because, there is no justification for hikes made by sectors whose input costs are determined in local currency, apart from inflationary expectations. However, at this point, we see the need for regulatory and supervisory mechanisms in relevant sectors to perform their duties more effectively. Of course, we are not talking about actions that run contrary to the rules of the free market economy. However, we must not forget that regulatory and supervisory mechanisms are also in place to prevent the abuse of the free market.

The rapid increase in the exchange rates brought with it hikes across myriad sectors in Turkey. In fact, since the expectation that the exchange rate will rise even more brought forward possible future demands, and thus price increases from the cost channel were accompanied by the pressure of demand. 

However, over the past week, we have experienced a decrease of almost 45% in the Dollar/TL exchange rate. Accordingly, we want to see prices being marked down, and we have every right to make this demand. Meanwhile, we must concede that the issue of price stickiness may indeed delay this outcome. However, the only thing that cannot be tolerated is opportunists who, this time, refuse to adjust the prices that they have already unfairly raised.