Reading Returns in a High-Inflation Economy

Every number on this site is nominal. In a low-inflation economy that is a technicality. In Turkey it is the single largest source of misreading, and accountants have a formal answer to it that is worth borrowing.

The problem with nominal figures

A figure denominated in a currency losing value quickly is measured with a shrinking ruler. Compare a fund’s value at the start and end of a year and you are comparing two different units. The arithmetic works; the meaning does not survive.

This is not a rounding issue. When inflation is high, the gap between a nominal return and a real one can exceed the return itself, which is how a fund posts a substantial gain and leaves its holders worse off in purchasing power.

What IAS 29 does

International Accounting Standard 29, Financial Reporting in Hyperinflationary Economies, addresses exactly this for company accounts. When an economy is designated hyperinflationary, the standard requires financial statements to be restated in the measuring unit current at the reporting date, rather than mixing amounts recorded at different times and different purchasing powers.

The mechanism matters less here than the principle: before comparing amounts from different dates, convert them to a common unit of purchasing power. Turkey’s designation as hyperinflationary for accounting purposes means published Turkish company figures increasingly reflect this treatment — which is worth knowing if you read the accounts of the companies inside an equity fund.

Applying the same discipline to fund returns

Fund returns are not restated under IAS 29 — the standard governs financial statements, not performance reporting. But the reader can apply the idea:

• Never read a nominal return alone. Read it beside the inflation figure for the same period. Every fund page here shows the CPI row for exactly this.
• Be sceptical of long compounding. A five-year nominal return in a high-inflation currency is a very large number that means much less than it appears. The longer the window, the more the ruler shrank.
• Pick your unit deliberately. Lira purchasing power and hard-currency purchasing power are different questions with different answers, and neither is automatically the right one.

Where CPI stops being enough

Two honest limits, and they cut against relying on the inflation row too mechanically:

First, CPI is an average basket. Your own inflation depends on what you actually buy, and for imported goods, rent or education it can run well above the headline. A “real” return computed against CPI is real against the average household, not against you.

Second, purchasing-power parity holds poorly over short periods. Adjusting a lira return for lira inflation tells you about domestic purchasing power; it does not tell you what happened in dollars, because the exchange rate and the inflation differential routinely diverge for years.

The practical habit

Look at three numbers together, never one: the nominal return, the CPI comparison, and the USD or EUR comparison. If all three agree, the conclusion is robust. When they disagree — which is common — the disagreement is the actual information.

All three sit on every fund page, in the benchmark block. See what lira savings actually earn for the applied version, or the methodology for how each is derived.