Tyranny of numbers

The three rates of inflation

Posted in General, Macroeconomy by Djavad on July 5, 2009

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!

4 Responses

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  1. dsalehi said, on July 10, 2009 at 11:09 am

    Thank you, Mohammad, for pointing to the interview and the link, which I had not seen. It is interesting that AN agreed with the policy, or his economic team did, but it still leaves the question unanswered as to why Mazaheri was fired. Or did he leave on his own accord?

  2. hadi said, on July 9, 2009 at 1:01 am

    Would you please explain your last sentence? Did he really mean to keep inflation high, and on what grounds?

    • dsalehi said, on July 9, 2009 at 9:33 am

      He opposed the restrictions on lending, to keep the lending program going. In my opinion without the restrictions inflation would have been higher, because the quick returns projects were not quick enough in bringing supply to the market to keep prices from rising. Does this mean that AN tried to keep inflation high? Not quite.

      • محمد said, on July 9, 2009 at 10:26 pm

        Mazaheri (former CBI head) said in an interview (with Hamshahri Nowruz 1388) that at first Ahmadinejad opposed the restrictions, but apparently Mazaheri was successful in convincing him that the lending program would be disastrous to the inflation. So Ahmadinejad supported Mazaheri when he wanted to “lock up” the reserves. There were differences at first, but finally Ahmadinejad realized that how his former policy was flawed. See the comment by “محمدحسین” here.

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