Tyranny of numbers

Good economic news greets President Rouhani as he arrives in New York for the UN General Assembly this week: a declining trend of inflation.  According to the latest consumer price index data published by the Statistical Center of Iran, during the Iranian month of Shahrivar (August 21-September20, 2019) inflation reached its lowest level since Trump’s assault on Iran’s economy began 18 months ago: the CPI increased at an annual rate of just 6.1 percent.  When Trump reimposed sanctions in May 2018, inflation was quite low: 2.7 percent annually in March 2018 and rose to 126.7 percent in October.  It has  declined more or less continuously from that peak since (see graph of the 3-month moving average below).

Source: Statistical Center of Iran.

Food prices led the deceleration in the rate of increase in prices.  The food CPI actually fell by 1.4 percent compared to a month ago.  Food prices had led inflation on the uptake too, which is why they are 63.5 percent higher than a year ago, compared to 45.2 percent for all prices.

Decline in inflation does not mean reduced suffering for the people, however.  Prices are much higher now than they were a year ago, which is why friends in Iran speak of “ravaging” inflation (bidad mikoneh), even though it has been declining for about a year now.  Average prices have risen faster than incomes, something which the latest household expenditure and income survey data confirm (read a brief discussion of these numbers here)

Price stability is necessary for economic recovery, and the trend in inflation is in the right direction for Iran.  If it continues, it will help the rial maintain its value as it has in the last few months (dollar is one-third cheaper now than it was at the hight of the currency crisis a year ago), which will help businesses plan with less uncertainty for the future.

But uncertainty for Iran sees no end in Iran, and there are plenty of reasons to remain skeptical about economic recovery, and even inflation staying low.  There is major uncertainty in the geopolitical sphere, and then there is the large government deficit created by the drop in oil revenues, which accounted for a quarter of the 2019/2018 budget. Government expenditures have contracted in real terms, mostly because increase in government salaries have been kept to half the rate of inflation.  How long before the government resorts to printing money and reigniting inflation, is anybody’s guess.