Living with High Inflation: The Distributional Impact of the Cost of Living Crisis in Türkiye
Türkiye experienced the highest inflation experience in the OECD during the cost of living crisis during the cost of living crisis in the early mid-2020s. While the European Union inflation rate was 9.2% in 2022, declining to 6.4% in 2023 and 2.6% for 2025 - Eurostat, year on year inflation peaked at 85% in Türkiye in October 2022 and with annual inflation remaining above 65% at the end of 2023 before dipping to about 45% at the end of 2024 - Turkstat. Such large price changes impact the income distribution in many ways. In this presentation, we describe a portfolio of research that has employed microsimulation based decomposition methods to disentangle the impact of large macro-economic changes on inequality. The research begins by describing the historical macro-economic volatility that Türkiye. Using the new ARIA microsimulation model we undertake a variety of different analyses focusing on different dimensions. We begin by examining the distribution of price changes before the crisis and after the peak crisis in 2022. We then explore the policy response in terms of the poverty effectiveness efficiency and the poverty gap efficiency social transfers, which as an archetypal Southern European Welfare state mainly focuses on pension age work replacement benefits. With a progressive income tax system, we explore the nature of the fiscal drag within the system during this period. We contrast it with impact of price change on the regressive indirect tax system. With data from before the crisis and peak-crisis, we are employ a unique decomposition of the consumption and savings response during the crisis, emphasising in particular the differential savings response and the importance of durables as a source of hedging inflation for high income households on the one hand and the prioritisation of necessities by low income households. Furthermore, we explore the inequality increasing nature of the labour market, where some sectors have been resilient to price inflation in terms of wage growth, combined with other sectors that have not. A key conclusion is the distributional impact of price change has a greater impact when behavioural responses are considered than the literature that focuses on pre-behavioural response. As a result the consumption patterns have a greater impact than income changes.
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