Participationbased Producer And Consumer Price Index
Inflation, as a technical term, can be defined as the continuous increase in the general level of the prices of goods and servicesa
If you ask any person on the street, “what is inflation?”, you will probably get an answer. Because the outcomes of inflation touch all of our lives. Unlike the general consensus, inflation is not what they call “high cost of living.” It can be regarded as an outcome of living, the decrease in the purchasing power of a household. If your income also increases as much as or above the inflation rate, you may not be affected by this high cost of living. However, it does not mean that inflation is a made-up thing. Inflation, as a technical term, can be defined as the continuous increase in the general level of prices of goods and services. In other words, the continuous increase in the prices of some goods or a one-time increase in the prices of all goods is not regarded as inflation. Although there are various types of inflation such as stagnation, deflation, cost inflation, demand inflation, structural inflation, creeping inflation, galloping inflation, and hyper-inflation, we will not discuss them in our article today.
WHY DO ECONOMIES NEED INFLATION?
“Why do economies need the inflation rate and where do they use it?” The answer to this question is quite long actually. First of all, central banks take the inflation rate as an indicator to ensure and maintain price stability, which is their most important task basically. Probably heard by many, the “inflation targeting” refers to the approach with which central banks determine and shape their monetary policies around a target inflation rate. Governments’ renewing valuation rates also take inflation as the basis. The inflation rate is used for increases in employee and retirement wages. Rent increases are based on the average annual Producer Price Index (PPI) and Consumer Price Index (CPI). Market interests also follow inflation rates closely. The reason for inflation-indexed financial products is this magical rate. International investors try to estimate the real profit they can make by going through the inflation rate as well as the exchange rate of potential countries. We can extend this list further and further.
SEEING INFLATION THROUGH THE LENS OF PARTICIPATION FINANCE
If we are going to see the need for determining the inflation rate in terms of participation finance, we will have to add new reasons to the ones mentioned above. In the participation finance market, it has been discussed for a long time whether the maturity difference up to the inflation rate can be regarded as interest or not. Although there are Islamic opinions that advocate for the opposite, what has prevailed is that it is essential to protect the purchasing power of the amount given as the loan in the collection of the debt. Despite the on-going debates on the issue, today, the only official and standard criteria that we can use to determine the depreciation of money in the purchasing power is the inflation rate calculated by the Turkish Statistical Institute (TÜİK). Another practice that is allowed by Islamic law within the participation finance system is the real inflation difference that participation finance institutions can accrue within the delay period for non-performing receivables. In other words, it is the decision that the depreciation share of the debt amount can be collected from the debtor. In this case, CPI or PPI-CPI average calculated by TÜİK is taken as a basis. As a result, the inflation rate has become an indispensable indicator value of both conventional and participation economy and finance.
HOW IS TÜİK INFLATION CALCULATED?
TÜİK inflation is calculated under two categories as PPI and CPI. PPI is an index that shows the changes in production prices, i.e., input prices of domestic products offered for sale within a certain period of time. Sector-based breakdowns of PPI such as mining, manufacturing, and energy are also calculated. CPI, on the other hand, refers to changes that occur over time in the prices of goods and services offered for household consumption. In the inflation calculated by TÜİK, expenses are grouped under 12 main groups and 43 sub-groups. Every goods and services have a weight in the basket, and these weights can be revised by TÜİK in the light of new data. Price changes of these goods and services groups are calculated monthly through market surveys and observations. For example, according to TÜİK data, the 2019 inflation basket was created for 418 items and 895 item types by taking 544,256 prices from 4,274 houses and 28,711 workplaces.
oped in 2012 to determine whether it is possible to invest from Islamic perspective in stocks traded on the stock exchange. Updated by the Advisory Board within the framework of certain criteria, this share certificate basket guides the investments of participation finance customers. We believe that calculating the Participation Consumer Price Index and Participation Producer Price Index to be used in some calculations in the interest-free finance ecosystem will be an innovative step. The survey data of TÜİK will again be used while calculating these indexes, but goods and services not permitted to be produced by Islamic law will have to be excluded from the index. For example, alcoholic beverages and tobacco make up 4.23 percent of the current CPI basket, entertainment and culture 3.29 percent, and restaurants and hotels 7.86 percent.
It will be necessary to determine and deduct the illicit entertainment and accommodation expenses included in these items. In addition, it would be appropriate to review the weight coefficients of some goods and services from the point of view of participation finance, production, and consumption preferences. Interest-free financial institutions can apply this index only to the overdue receivables stated above at the first stage and can calculate the inflation difference. The greatest benefit of this application will be that it will reinforce the image of interest-free financial institutions in terms of their commitment to their principles. Even though it is still a recommendation at this point, we need more meticulous, multilateral, and multidimensional studies to make it much more practical.
Group Manager at Administrative Affairs of Kuveyt Turk Participation Bank Mustafa Dereci