Osman Şenkul
Nasreddin Hoca was selling eggs at the market. Business was good; the eggs were selling out quickly, and Hoca would bring in a new batch and put them on the stall.
His friends were curious about how this novice merchant was able to sell so well in such a short time, so they investigated and realised that the Hoca was selling the cheapest eggs in the market.
– Hoca, how much do you buy these eggs for?
– Nine for one akçe…
– How much do you sell them for?
– Ten for one akçe…
– Hoca, is this how you do business?
– It’s enough that my friends see me shopping…
However, the economy does not work like this; every production has a cost, every product or service has a selling price; the difference between the two is called ‘profit’. Under capitalist conditions, no economic unit that does not generate profit can survive; in short, ‘you can’t run a mill with water alone.’
Therefore, price is very important for economic units to be able to ‘make a profit’. Producers want to increase prices as much as possible to make more profit.
If people have money, they will still buy the goods or services they want, even if prices rise. Inflation then increases. Central banks raise interest rates to prevent inflation, and the value of money increases. When the currency appreciates, fewer people can afford to spend. Then sellers cannot raise prices as they wish; thus, inflation driven by ‘demand’ slows down.
However, there is also the cost side of the equation. As the production cost of a product increases, the producer must raise the price, whether there are buyers or not. Otherwise, the ‘profit’ approaches zero; it even turns into a ‘loss,’ as in the case of Nasreddin Hodja.
For some time now, there have been problems on the ‘cost’ side of the equation in Turkey. In Turkey, where dependence on imports exceeds 50 per cent in many sectors, every increase in exchange rates directly affects production costs due to the economic policies implemented by the government, especially after 19 March. In other words, the price of eggs rises from nine to eight per akçe. What can the teacher do? He tries to sell ten eggs for one penny in order to make a sale.
In addition to energy, Turkey, where a significant portion of high-tech components—including those used in automotive production, one of the key export items—are imported, is facing increasingly severe cost inflation pressures by 2025. Due to this ‘external dependency’ in production, the rising costs generated by external inputs (energy, imports, exchange rates) continue to put pressure not only on wages but also on operating profits. Conversely, although demand inflation is weakening due to wage increases adjusted to the low target inflation, high costs play a significant role in predicting and spreading price increases, particularly through expectations, rent & housing costs, and service prices. Although Nasreddin Hoca has no connection to these predictions, today’s Turkish business world is taking precautions by determining prices for three days, a week, or a month ahead based on rising cost inflation.
As we are well aware, global energy prices fluctuate depending on geopolitical developments. Seasonal effects and global demand, particularly for oil and natural gas, create cost pressures. Furthermore, the depreciation of the Turkish Lira increases the cost of imported intermediate goods. This pressure is particularly intense in sectors dependent on imports, especially for industrial inputs and intermediate goods. Exchange rate volatility also contributes to rising expectations.
This situation increases the risk of costs being passed on to prices. In addition, cost increases in the housing, transport and services sectors are significant; transport, rent, energy, infrastructure and logistics costs are affecting company costs. Furthermore, the public sector tax burden, regulatory costs and the pricing behaviour of institutions are also fuelling cost inflation. Some analyses also include ‘brand/profitability expectations’ among the factors reflected in prices.
In particular, increases in intermediate goods and energy costs are a significant channel pushing up final goods prices. In short, pressures on cost inflation remain strong; risks persist in external and externally linked factors such as foreign exchange, energy and input costs. However, the ‘demand inflation’ that the government is trying to suppress with high interest rates is related to strong demand and the upward pressure it exerts on prices. Domestic demand contributed positively to growth in the last quarter of 2024; however, it is clear that public consumption, rather than private consumption, played a more driving role in this rise in total demand.
Furthermore, the 2025 industrial PMI (Purchasing Managers Index) and new order data point to a weakening in both domestic and foreign demand, linked to a decline in new orders in the manufacturing sector and a cooling trend in domestic demand.
The Central Bank’s Inflation Reports also view the output gap as a risk; it is noted that the output gap could have an upward effect on inflation in the event of demand pressure, wage pressure and insufficient fiscal discipline. In fact, it is worth dwelling on the causes of the ‘output gap’ highlighted here, because, alongside exchange rates, high interest rates, which are more effective in rising costs, can sometimes cause machinery to stop in many businesses. According to economists, the most effective indicator of this situation they focus on is the rapidly rising unemployment figures.
Although the Turkish Statistical Institute (TÜİK) sees a ‘slowing trend’ in inflation, cost pressures and ‘demand pressures stemming from expectations of rising prices’ are intertwined. Particularly, in the positive scenario presented by the Treasury and Finance Ministry, although a disinflation process seems possible, the risks (especially external shocks, exchange rate volatility, and a breakdown in fiscal discipline) have not yet disappeared. In particular, the lack of expected increases in tourism, which is considered a key source of foreign exchange inflows alongside exports, and the inability to produce enough of many food products to meet even domestic demand, which also narrows the export channel, appear to further increase the impact of these risks.
Furthermore, developments in CDS (Credit Default Swaps), which determine the cost of external borrowing, another channel for foreign exchange inflows, are not yet at a level that provides relief, despite being described as ‘positive’ by the Treasury and Finance Ministry; in other words, external borrowing remains difficult and costly. CDS spreads, which rose above 300 basis points following Ekrem İmamoğlu’s arrest and the associated political tension, have been brought down to the 250-260 point range due to developments such as the postponement of trials and the resolution of some uncertainties.
The calculation based on examples shows that, given the 10-year US Treasury bond yield is 4.2%, a 300 basis point CDS adds 3.0 percent, and additionally, a liquidity/issue margin of around 0.5 to 1.0 percent is added. Thus, while everyone else accesses the source at a cost of 4.2 percent, Turkey can access it at a cost of between 7.5 and 8.2 percent. This can also be calculated as follows: let us say that if the CDS increases by 100 basis points, the annual borrowing cost also increases by the same amount. This means an additional cost burden of 1.0 percent, corresponding to 100 million dollars, on 10 billion dollars of external borrowing.
In other words, in Turkey, which is ‘dependent on external sources,’ this ‘cost inflation’ imposes significant additional costs on businesses and producers, and of course, the ‘crushing weight’ of this ‘artificial cost’ burden is also placed on the shoulders of millions of pensioners and wage earners who struggle to bring bread and eggs home. Nasreddin Hoca says he sells eggs so that ‘friends can see him shopping’; but those who govern the country, especially the economy and related ministries, naturally make their decisions so that ‘friends can see them in office.’