Tyranny of numbers

The return of inflation

Posted in General, Inflation, Macroeconomy, Sanctions by Djavad on July 1, 2018

According to the Central Bank of Iran, last month (Iranian month of Khordad, which ended on June 20, 2018), consumer prices increased by 4.3 percent.  This translates into a whopping annual inflation rate of 67 percent.  The government announcement was much less alarming, using the so-called point-to-point inflation rate (Khordad 2018 over the same month 2017) of 9.4 percent.  As I explained in a recent interview in Tejarat Farda (in Persian), the point-to-point reporting is very misleading when inflation is accelerating, and does not fool anyone (any more than I could fool a police officer whose radar registered my speed at 80 miles per hour by claiming that my average speed since leaving home has been below the speed limit).

To see the recent spike in Iran’s rate of inflation in historical perspective, I present below the updated moving average chart that I have used before in this blog.  I believe that the three-month average is a more accurate depiction of how fast prices are increasing at this time than the point-to-point increase.  This measure of inflation, which has fluctuated around 10 percent since 2014, shot up to 40 percent last month.

movingaverage_June2018
Note: Moving averages are based on the CBI monthly data (except for the last point on the graph, which is a two-month average).

The reasons for the sharp increase in prices is not hard to find: The collapse of the rial caused in part by Trump’s blow to the Iran nuclear deal and the imminent return of US sanctions, and in part by government’s switch from austerity to expansionary policies, signaled the announcement last March of a 20-percent increase in the minimum wage. These reasons also suggest that, unless the government loses control of the money supply, inflation should come down and settle down at a lower rate (20 percent?) for the rest of the year.

As I noted in my recent post on Lobelog.com, the rapid rise in consumer prices suggests that President Hassan Rouhani’s economic reform program, built around low inflation, has unravelled.  The silver lining in this unravelling is that inflation will shrink the real value of the enormous debt of the government and public enterprises, estimated by the Majles Research Center to be 6,260 trillion rials, or about 43 percent of the GDP.

The banks, too, stand to benefit from inflation since they owe depositors much more than the value of their assets.  Inflation will increase the value of their real estate investments so they can become solvent again.  As usual, inflation benefits debtors and hurt lenders.  And since the powers that be are the main beneficiaries of inflation, they may not be in a hurry to end it.  The ordinary people’s rush to buy dollars and gold is their attempt to escape being on the losing end of this game.

 

 

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