Prices in Iran and what they mean for the PPP exchange rate
As I have argued in this blog and elsewhere, there is not a single equilibrium exchange rate for the rial. If you believed my rough calculations in my previous post, and if you needed to report only one number, the exchange rate would be something around 20,000 rials per dollar (about 96.5% increase over the old exchange rate of a little over 10,000). The next best thing after an equilibrium exchange rate (ER), one that is actually more useful for welfare comparisons, is the Purchasing Power Parity ER. Here are my back-of-the-envelop calculations of the PPP rate for Iran in 2012.
The PPP is the rate that equalizes the value of the same basket of goods and services, one purchased in Iran and another in the US. For example, if the same basket of food, clothing and rent costs $100 in the US and, say, 2,000,000 rials in Tehran, then the PPP rate would be 20,000. The World Bank calculates these rates for Iran and more than 100 other countries using the differences in inflation rates between that country and the US. Since the Central Bank of Iran is no longer publishing detailed reports on prices, I have been collecting price information on some key items in Iran (mostly Neishabour) when I call friends and family (see table below). These prices help me get a rough idea of what the PPP exchange rate may be these days.
To get your own estimate of the PPP rate, you can average the numbers in the third column (Implicit ER) using whatever weights you think are appropriate for the type of income class you have in mind (such as a basket for the poor). There are lots of important items missing from the table, such as education, services, durables and clothing. It is reasonable to take all the tradable goods, such as TV’s at the 30,000 exchange rate, but non-traded items should get something closer to 20,000 rials per $. So, for example, if a poor person spends most of his money on food (say 40% of his total expenditures), things like bread and chicken with implicit ER’s between 2,500-10,000, then you know that the PPP is much less than the current free market rate of 31,000. Services probably have PPP rates less than 10,000 (for example, the rate for haircut is about 3,000 rials). Let us assume that food and services (including rent), account for 80% of this person’s budget have a PPP of 10,000 rials and the other 20% are goods with a PPP of 30,000 rials. Then the average PPP for this basket is 14,000 rials per $. For comparison, note that the World Bank estimate of the average PPP rate for Iran in 2010 was 5006 rials. To get to 14,000 rials in 2012 you would have to assume that inflation in Iran exceeded that in the US (close to zero) by 140% in the last two years, or roughly 70% per year. These are very high numbers, so I would assume that the PPP number of 14,000 is an upper bound.
Of course if you take a rich person’s basked, you would get a higher PPP than 14,000 rials. It would be useful if someone could prepare and post an (excel) table like the one below for Tehran. You can post it into the comment section directly or send it to me to post it here.
Another value of my anecdotal method of collecting price information is that it helps me keep track of inflation. Some of the prices I report, such as taxi rides and the unskilled wage are price aggregators themselves and act like a price index (similar to Economist’s Big Mac index). In the last two months that I have been collecting these data I have noticed that inflation has slowed down, after its sharp increase following subsidy reform and devaluation. So, no hyperinflation so far.
The observation that inflation has slowed down is consistent with the hypothesis (to which I subscribe) that the high rates of inflation in Iran in the last two years were in large part the result of two important adjustments in energy prices and the exchange rate, both of which were necessary for long run economic growth. The former needed to be adjusted by a factor of about 5 and the other by about 2-3, so the level of inflation Iran has experienced in recent years is not out of line with these huge adjustments.
The sad thing is that Iran is getting its prices right at a time when its ability to take advantage of them is very low, thanks to sanctions and economic policy paralysis in Tehran.
Table of prices in Iran and US with their implied exchange rates
|Gasoline (liter)||6,000||1||6,000||Average of 4000 and 7000 prices|
|Electricity (kwh)||700||0.1||7,000||Average price|
|Public transportation||1,000||1||1,000||City bus|
|Taxi (service line)||3,500||2||1,750||Set short city routes|
|Inter city taxi (Mashad-Neishabour)||60,000||10||6,000||1.5 hours ride|
|Airport taxi in Tehran||350,000||70||5,000||45 minute ride|
|Train (Tehran-Mashad)||350,000||100||3,500||600 miles|
|Bus (Kerman-Tehran)||280,000||50||5,600||600 miles|
|Rent (2 bdrm)||8,000,000||800||10,000||Per month|
|Unskilled wage||250,000||50||5,000||Per day in construction|
Notes: All units are in kilograms unless otherwise noted. Iran prices are in rials and US prices in dollars.