The three rates of inflation
A friend asked me to write something to help reduce the confusion surrounding how inflation is measured and reported–or misreported during the election. Here is a brief explanation of not how the Consumer Price Index (CPI) is measured, which is a long story, but the three ways it can be reported.
First, there is the obvious CPI which the Central Bank reports annually. This is the rate of increase of the average index for, say, 1387 over 1386, which is about 25 percent.
Then there is the month to month inflation rate, which is the rate of increase of the index in a particular month, say Ordibehesht 1388 (May/June 2008) relative to the same month in 1387. This rate was 23.6%, which indicates that the rate of increase in prices during 1387 has been falling.
Finally, there is a third rate of inflation, which is the “time rate of change”, or the verbal equivalent of dP/dt. This rate in Ordibehesht was 15.4%, which is much lower than 26.8% the year before. In Esfand 1386 (March 2007) this rate reached it peak of 37.7%! The latter is what is monitored by the Central Bank to decide on monetary policy. Once this rate is down to what they feel comfortable with, say 5-6% (I wish!), then they will ease up on credit.
By quoting this rate during his June TV debate with Mr. Karrubi, Mr. Ahmadinejad was able to argue that the inflation rate has come down. In some sense, he was absoultey right, because the rate is less than half what it was at its peak in Esfand 1386. But he was wrong to take credit for it, because he tried hard to prevent the Central Bank from bringing inflation down!