Iran’s hyperinflation myth
I just published a short piece in Al Monitor to refute the widely held belief that Iran has been experiencing hyperinflation. As I explain there, the myth originated in the application of textbook economics of hyperinflation to Iran, not taking into account two important facts. First, that the Iranian government does not have to print a lot more money just because the free market rate for the dollar tripled. This is because it sells foreign exchange, not buy it. If the government had to buy its foreign exchange from private exporters, then to manage its operations it would have to print money at an accelerating rate to meet its obligations. Second, because the government is the main supplier of foreign exchange, and is therefore a price maker, not a price taker, it can price discriminate, and sell forex at different rates (three rates now). Of course, there are limits to its price making ability. It can pour more money into the free market and lower the rate there, or sell more at the subsidized rate of 12260 rials per $ to keep inflation down. But since it has a limited (and shrinking) supply of foreign exchange, mainly thanks to the sanctions, it has to be careful how it uses its forex. If the Central Bank tries to feed capital flight or speculation (as in did in the early 1990s), it may look in charge for a while but soon will be sorry.
The net result is that prices in Iran in the last three months since devaluation have not behaved anything like in hyperinflation. Here is how inflation has been behaving in the last 30 months:
True, the last three months have seen very high inflation, though not as high as in winter 1995, but the latest data, for the month ending December 20, 2012, indicate that inflation has decreased substantially — down to 2.5% per month from 4.5%. If inflation remains at the latter rate, the average rate for the year will reach above 30%, which is three time the rate of inflation just two years ago. There is a good chance that it might stay on the low side. Thanks to the strength of the salaried middle class and president Ahmadinejad’s free spending habits, awareness of inflation has heightened in all decision making circles in Iran.
A final point about the hyperinflation myth that is worth emphasizing is how little the US media says about a hyped story that turned out not to be true. (Contrast this with the hoax about the death of the fake girlfriend of a college football player that has been all over the US media this past week.) If this were a story about the economy of China, India, or Brazil, commentators from these countries would have been all over the guy who published the original flawed analysis and the reporters who reported it without questioning his assumptions. As I point out in my Al Monitor piece, the hype was not without potential serious consequence — it could have persuaded Obama to harden his position on Iran’s nuclear negotiations, tying his own hands post-election and bringing the US closer to the path of war with Iran. Such is the state of Iran’s international intellectual isolation in matters economic.