Profits, Wages, and Taxes: Understanding Inflation Dynamics in Türkiye

Abstract

The COVID-19 pandemic and the Russia-Ukraine conflict have led to a global living standards shock, increasing interest in the interactions between firm profits and inflation. This study examines profit-driven inflation dynamics in Türkiye, also considering wages and net taxes. Using the deflator decomposition method and the Local Projections model, it analyses their effects on consumer inflation. Findings show that unit profit inflation is a key driver of price increases, while wage-price pass-through is nonlinear, and tax effects are delayed but significant. The study highlights the need for an integrated policy approach that combines monetary, fiscal, and competition policies to manage inflation effectively.