In our previous discussion, we talked about the government’s obligation regarding inflation and the situation where citizens turn to foreign currencies during inflation. But why do the citizens of a country demand foreign currencies? As you can understand, there is a very close relationship between this and inflation.

In general, money serves three fundamental functions. First, it facilitates transactions; second, it serves as a unit of account; and third, it acts as a store of value. During inflationary periods, all three functions become challenging for the national currency. As prices continuously rise, the price tags on products constantly change, businesses struggle with proper profit/loss accounting, and the purchasing power of the income saved in the national currency continuously diminishes. In such times, citizens prefer to negotiate prices in foreign currencies, companies demand inflation accounting, and people hold their savings in foreign currencies.

Especially since the new economic management took office in our country, it has been observed that the inflation data announced by the Turkish Statistical Institute (TÜİK) has become more realistic. In July, there was a 9.49% increase in consumer prices, and in August, there was a 9.09% increase. This means that, on average, the goods and services that 100 Turkish Lira could buy two months ago have decreased by about 20% today.

During this period, it can be seen that the purchasing power of the US Dollar has remained relatively stable. What’s interesting is that the exchange rate of the US Dollar to the Turkish Lira has remained approximately at 27 Turkish Lira. In other words, while the Lira has lost about 20% of its purchasing power, it has preserved its value against the stable Dollar. Naturally, this is a paradox, and it shouldn’t be expected to last long.

Market participants can easily see this, so as long as inflation remains high, the demand for foreign currency will increase.