Reading inflation in Iran
There seems to be considerable confusion in the Iranian media about the pace of inflation. Since inflation is the main concern of the new Rouhani economic team, getting the facts right about its pace, whether it is rising or falling, is extremely important. There are questions about the accuracy of the official inflation figures, much of it exaggerated, but the most common source of confusion is not about the accuracy of official data but how to read them.
There are at least three ways to interpret the same price index number: point-to-point (which divides the index in one month by its value 12 month earlier), the average annual rate (a 12-month moving average and the government’s favorite when inflation is rising and wants to minimize it), or the monthly rate (which is closest to the speed with which prices are increasing at any particular time and therefore less amenable to manipulation).
There are three official price series (and 75 million unofficial ones!): the Central Bank of Iran (CBI) index of urban prices (1390=2011/2012=100), the Statistical Center of Iran (SCI) urban index (1390=100), and the SCI rural index (1381=100). All three series track each other fairly closely. Here are the monthly inflation rates based on the urban indices of CBI and SCI (annualized for purposes of comparison with the annual rates):
(For an updated graph click here.)
The striking feature of this graph is that inflation has been declining nearly every month since Esfand 1391 (April 2012), long before the Rouhani administration took office.
Now compare this graph to the one for point-to-point inflation (the moving average graph, which is what the CBI usually announces, looks very similar):
Which graph do you look at if you are the governor of the Central Bank of Iran? Clearly, the answer is the one with the monthly rates. The point-to-point graph is misleading because it places the easing of inflation in mid-1392 (summer 2013), whereas the first graph shows that it started six month earlier.
Looking at the point-to-point inflation is like trying to decide if someone is driving dangerously by looking at her average speed during the past hour instead of at how fast she went around a bend (also measured per hour). Cops and traffic judges work with the actual and not some average speed, so should monetary authorities. The whole point of generating timely price data is to know the actual speed at which prices are rising, not their average over the past 12 months.
Why does this matter? Part of the answer is quite obvious. Why should monetary authorities be reacting to high inflation that occurred several months ago now if it has subsided already? The less obvious answer is that they may want to tighten the money supply further, and letting on that inflation is coming down will weaken the resolve of the nation to tolerate austerity. In Iran, at this juncture, exaggerating the inflation rate helps the opponents of the energy price reform — the middle class, energy using businesses in industry and agriculture, among others — to press the government to hold off in raising energy prices and look elsewhere to fix the large budget deficit.
How inflation figures are read in Washington also matters because the dominant thinking on Iran is that continuing high inflation past Rouhani’s election shows that the sanctions continue to hurt, and Iran is in a weaker position than it says it is, so a better deal is possible by being very tough in negotiations (as they seem to be in Geneva this week according to the New York Times).