Moreover, these economic agents tend to put the blame on the falling inflation for the worsening of their situation. These economic agents that fail to harmonize with this new process are the ones who resist the most to the fight against inflation. This adaptation problem also prevents these economic agents from seeing the advantages offered by price stability. In this context, the most important development in fight against inflation is that credibility of current policies have improved, whereas the inflation target has increasingly become a more credible nominal anchor for a majority of the economic agents in Turkey. In other words, the inflation target was taken as a reference more extensively. Further developments will facilitate the adaptation of economy to changing dynamics and support maintenance of the price stability as well. Distinguished guests, Before discussing the effects of the falling inflation on economy, let me elaborate the importance of price stability for economies. As we all know, the primary objective of economic policies is to provide sustainable growth and to increase employment throughout the country. The role of monetary policies has been misunderstood for a long time. This wrong assumption is that the increase in inflation and growth are parallel to each other and growth rates can be accelerated by loosening the monetary policy. Frankly speaking, in the framework of early economics literature, this assumption can only be verified in the short term, in countries where inflation rates are low and there is no credibility gap in monetary policies.
BIS Review 63/2004  3  At present, producers are in a position to differentiate, to a large extent, whether the increase in prices is attributable to inflation or to an increase in demand, and can take their decisions with regard to increasing production, making investments, etc., within this framework. They now give importance to cost control and productivity increase while determining the profit margins in their pricing policies. Similarly, consumers have also begun to actively participate in the pricing process, using the advantage of a more competitive environment. At this point, I wish to emphasize two issues I deem significant. The first one of these has to do with inflation falling at a slower pace compared to other sectors, also due to pricing behavior directed to increasing the profit margins, at those sectors where demand is relatively rigid and competitive structure relatively weak. This situation, also expressed as rigidity in inflation, by way of causing differentiation in relative prices, forms an obstacle to prices to carry on their task of conveying information properly. The rigidity in inflation recently observed in Turkey, in sectors such as education, rental services and hospital services, with prices falling at a slower pace for the services group compared to the commodities group, is an example of this. It is crucial that measures to increase competitiveness in these sectors are taken promptly in order to eliminate this distorted structure and also in terms of the risk it constitutes to the inflation target in future.