Interesting observation from the Central Bank: While low-income people are affected by inflation, the rich are not affected

The analysis titled "Monetary Tightening and Consumption Expenditures by Income Level" prepared by the Deputy Director General of Structural Economic Research of the Central Bank of the Republic of Turkey, Altan Aldan, Assistant Economist Barbaros Eriş and Researcher Alper Yıldırım was published on the Bank's blog page, Merkez's Güncesi.

In the analysis, which examined consumption expenditures in different income groups in order to better understand the recent monetary transmission mechanism, it was stated that tight monetary policy affected household consumption expenditures in different ways depending on their income levels.

CONSUMPTION EXPENDITURES OF DIFFERENT INCOME GROUPS WERE EXAMINED

The analysis stated, "While individuals with more savings opportunities are expected to reduce their spending due to higher deposit yields, the spending of individuals whose demand is sensitive to credit is expected to slow down due to rising credit costs. In this article, we examine consumption expenditures in different income groups in order to better understand the recent monetary transmission mechanism."

In the analysis, it was noted that expenditure patterns according to income groups can be monitored with the Household Budget Survey data published by the Turkish Statistical Institute (TUIK), however, it was reminded that these data are published annually and the last data is for 2023, and expenditures according to income groups cannot be directly observed in a timely manner and at a high frequency.

It was reported that an indirect method was followed in the analysis, which would therefore shed light on the year 2024.

Firstly, the analysis stated that representative consumer income was calculated for each product using the consumer spending on products in the Consumer Price Index (CPI) basket and household income, and the ongoing process was explained as follows:

“We then match each product with the relevant sector and use retail sector turnover and sales volume data for the period under review to measure demand for the products. Using the product-sector match and representative consumer income, we divide the retail subsectors into three categories: products that appeal to high, middle and low income groups. Finally, we aggregate the turnover of the sectors according to these categories and obtain income group-based turnover and sales volumes.”

In the analysis, when the course of turnover over time was examined in detail, it was pointed out that the annual increase in turnover decreased in all categories with monetary tightening.

DECLINE IS MORE OBVIOUS IN THE HIGH INCOME GROUP

It was stated that the decline in question was more pronounced in products appealing to the high-income group, and that just before the start of the tightening, in the second quarter of 2023, the annual turnover increase in products appealing to the high-income group was approximately one and a half times the increase in products appealing to the low-income group, while with the monetary tightening, the increase rates in both product groups decreased to similar levels.

HIGH INCOME GROUP SAVES

The analysis also noted that with monetary tightening, turnover increases in products appealing to the high-income group fell below the increase in products appealing to the low-income group, indicating that especially high-income households tended to save.

The analysis, which stated that a similar picture is encountered when looking at sales volumes, stated that "While the change in sales volume of products appealing to the high-income group was approximately 3 times the annual change in low-income groups before monetary tightening, the increase rates regress to similar levels after the tightening. In other words, sales in products appealing to the high-income group are affected more by monetary tightening in real terms than products appealing to the low-income group. However, unlike turnover, the increase rate in sales volume of products appealing to the high-income group is slightly higher than other products. This observation indicates that there is a differentiation in the relative prices of product groups."

In summary, the analysis emphasized that with monetary tightening, consumption expenditures slowed down in all income groups, and the most significant slowdown occurred in products appealing to the high-income group, which had a much stronger trend compared to other groups before monetary tightening.