Tyranny of numbers

Is Iran’s inflation rising?

Posted in Inflation, Macroeconomy by Djavad on July 27, 2019

The most recent report on consumer prices (link in Persian) published by the Statistical Center of Iran (SCI) last week shows that prices rose faster in Tir 1398 (June 21 to July 20, 2019) than they did in the preceding two months.  Low inflation rates during Ordibehesht (roughly, May) and Khordad (June), 19 percent and 10 percent (measured annually), seemed to signal that the cost push inflation of 2018 may be working its way out of the system.  But, the sharp increase in Tir prices, 38 percent annually, three times as fast as the previous month, may suggest otherwise. The dollar in the free market responded quickly, jumping above 120,000 rials per dollar.

Is high inflation finding a second wind?  Quite likely.  The government delayed increasing the salaries of its employees for an entire year while prices were rising, but the promised 20 percent increase is coming in.  It may also be loosening price controls that have pushed many producers to the verge of bankruptcy.  Finally, producers are discovering the advantage of selling their goods in neighboring markets — Iraq’s produce markets are increasingly dominated by Iranian fresh produce — pushing domestic prices up.

One place to go for some answers is the 2012 crisis.  The graph below compares the high inflation rates of today with inflation during the 2012-2013.  It depicts the 3-month moving average of monthly inflation, measured as annual rates, using the CPI index for the whole country.  I use the 3-month moving average so as to reduce the month-to-month variation in inflation which may be seasonal.  During a crisis, the best way to view inflation is on a monthly basis, not as month on month a year ago.  This is how central bankers watch inflation, the same as you would when you drive — not how much father you are from where you were an hour ago, but your speed now, measured kilometers per hour.  There is much confusion in the Iranian media about the course of inflation.  Many commentators who look at the month-on-month change in prices speak of rising inflation because the month-on-month rate is still rising.

The graph shows that after the devaluation shock of 2012, the path to lower inflation took a year and a half and was not smooth.  So, it is possible that this time, too, it will take a few more months and the downward trend will be punctuated by a few upward blips.

But keep in mind that the two crises are not the same. First, the president in charge during the first crisis was the populist and cash-transfer happy Mahmoud Ahmadinejad, whereas today Hassan Rouhani is in charge who is wary of printing money for social programs.  To Rouhani’s disadvantage, the current crisis is much deeper and is not going away any time soon.  Recall that two months before the big crash of the rial, in September 2012, secret negotiations between Iran and the US that would in July 2015 lead to the historic nuclear deal had started.

Looking more closely as the CPI data for Tir (roughly, July) reveals that prices of non-traded goods, such as health and housing, are rising fast and catching up with inflation in traded goods. The latter naturally rise quickly after devaluation as prices of imported goods rise immediately followed by prices of goods that can be exported.  The price index for heath rose by 99 percent annually and for housing by 68 percent (led by utilities which rose by 111 percent and rents which increased by 62 percent).  The good news is that in comparison with these items, the rise in food prices was moderate, 17 percent annually.

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