Tyranny of numbers

In my last blog post I suggested that Iran’s inflation may be slowing down, and the latest consumer price data from the Statistical Center of Iran (SCI) suggest that this may indeed be the case.  The Consumer Price Index (CPI) published by SCI rose by 2.6 percent for the month of Azar (November 21 to December 20), an annual rate of increase of 26 percent.  This is high by world standards but low by the standards of this summer, when in August the rate shot up to 127 percent (see Figure 1).  More importantly, it is about the same as the month before, which is why it is safe to say that calmer — not better — times are ahead.  Unfortunately, the reporting of prices has created confusion, some numbers showing inflation slowing while headlines say the opposite. 

Figure 1. Monthly inflation, expressed in annual rates, using the CPI of the Statistical Center of Iran.  

Two factors are responsible for this confusion.   First, as is common in Iran, the Iranian media report inflation using the point-to-point measure, which is simply the ratio of a given month’s CPI to the same month a year ago.  This is not strictly speaking inflation in the month in question because like the police that does not measure the speed of a car as the average over the last hour, the speed of prices should be measured during the month.  The police wants to know your momentary speed because it can be dangerous even if your average speed over the last few hours was low.  Likewise, to set its monetary policy, a central bank wants to know the speed of prices now, not over the last 12 months.  It is easy to see that it is possible for inflation to be coming down while the month-on-month inflation rises. This is precisely what happened in Azar, when the SCI report noted that between Aban and Azar, measured month-on-month, inflation had increased from 34.5 percent to 36.9 percent, when in fact the speed of increase in prices was slowing. 

Speaking of central banks, the decision of the Central Bank of Iran (CBI) not to release (yet) its CPI for urban Iran for Azar has people wondering if it was too high and if the SCI rate is underestimating current inflation. According to news reports, the CBI figure that briefly appeared on its site was 30 percent higher than SCI’s, which still suggest a downward trend for inflation.  Currently, the two organization are in a dispute over which organization has the legal right to produce the CPI and national accounts.    

How close are the two CPI’s?

Figure 2 compared the urban CPI of SCI and CBI.  Until 2018, the two series were very close, but since November 2017, the CBI index has exceeded SCI’s index.  The divergence may be due to different coverage of cities and commodities, or because they use different weights for commodities in the calculation of the CPI.  The two agencies collect their own separate household expenditure surveys, which seems like a waste of resources.  SCI makes survey enjoy great credibility because they are publicly available in unit record and have been therefore heavily vetted by researchers. CBI surveys are not publicly available.  It is good to keep in mind that these are turbulent price times, and as the variance of prices increases so can the variance in the error with which the CPI is measured.  

Figure 2. CPI for urban Iran accounting to the Statistical Center and Central Bank (1395 (2016/17)=100)

Is slowing inflation a good economic sign?

Not necessarily.  It is good inflation is down from its peak of 127 percent (annually) last summer.  Containing inflation is critical is Iran’s economy is to regain some measure of macroeconomic stability.  Without it, an orderly adjustment to the shock of sanctions is not possible.  Rising prices redistribute rapidly and sometimes unpredictably, adding to social tensions.  Lenders lose and borrowers gain, those on fixed wages and salaries lose while producers and the self employed stand to gain.  The last spout of inflation was accompanied by lower inequality but that was only because of the hefty cash transfers by President Ahmadinejad.  

There is also the danger of further significant devaluation if inflation stays high.  As it is it is hard to expect the rial to maintain its level at the neighborhood of 100-110k rials per USD.  Still, it is safe to say that the risk of entering a vicious cycle of inflation and devaluation that has characterized Venezuelan hyperinflation is low.  

Slowing inflation may be bad news if it is because of falling demand and general economic contraction.  No doubt adjustment to the shock is not over and more economic pain for ordinary Iranians is on the way. The pain of lost jobs and wages is adding to the pain of rising prices every day.  There is reason to believe that the recession ahead will be worse than what Iran experienced after 2012, when sanctions tightened under Obama.  At that time, the collapse of the rial and the resulting high inflation were quickly followed by uplifting news — the election of Hassan Rouhani in June 2013 and the start of the nuclear talks with the 5+1 quickly after that.  

There is little on the horizon now that can reverse the grim mood of Iranian families and producers that quickly.  Change in the US policy of collective punishment of Iranians is unlikely to change before 2021, and the EU’s promise of setting up a mechanism to give Iranian traders limited access to international markets seems just that.