Tyranny of numbers

Surprisingly, despite the fact that timely information about the speed with which prices rise is published regularly at the end of each month, there is a debate (link in Persian) whether inflation is rising or falling. The facts are not in dispute, but their interpretation is. The monthly rate of inflation has slowed down considerably in the last three months but that is not the only way to measure inflation.

Prices rose by 12.2% in Khordad (May 20 to June 21), 4.6% in Tir and 2.0% in Mordad. The equivalent annual rates (compounded over 12 months) are more dramatic: 299%, 76%, and 26%, clearly a downward trend. If you believe that inflation is the speed of price increases, there is no question that inflation has slowed by quite a bit.

The monthly inflation in Khordad was unprecedented and understandable. It followed two shocks to food prices arising from the the removal of subsidies for import of basic commodities, mainly food items, and from the Russian invasion of Ukraine. Given the cost-push source of the recent rapid increase in prices, it is no surprise that inflation has slowed once the original shock has worked its way through the system. Whether inflation continues at the slower pace of Mordad depends on other things, including the prospects for a nuclear deal.

But the question of the trend for the last three months should in principle be easy to resolve with existing data. The reason why it has not is because of different ways inflation is measured in Iran. There is the so-called point-to-point measure of inflation, which is usually defined as the average rate of CPI growth for the past 12 months. This measure increased from 40.5% in Tir to 41.4% in Mordad. There is yet another definition of point-to-point which SCI uses, and it divides this month’s CPI by the CPI of the same month a year ago. This measure produces a higher rate, but it declined from 54.0% in Tir to 52.2% last month.

That is all that the CPI data can tell us. Different measures tell somewhat different stories, but at least two indicate declining inflation. The monthly rate is the measure that I prefer for Iran’s turbulent economy, and one that I have used in the past to calm hyper-inflation fears stoked by the likes of Steven Hanke who has proved wrong multiple times predicting Venezuelan-style chaos in Iran.

The graph below, which is an updated version of similar graphs that have appeared in this blog, uses 3-month moving averages to highlight the periodicity of inflationary pressures. The graphs reveals five bouts of high inflation, each caused by an external shock that raised prices suddenly but subsided a few months later. In between, you can see the underlying endemic rate of inflation, caused by lack of resources to meet various demands on public expenditures. Hyperinflation occurs when external shock cause rising inflation, which is not what this graph displays.

A note of clarification: There is no doubt that in the first half of 1401 inflation is running higher than 1400, probably by 10 percentage points. However, this does not contradict the fact that in the last couple months inflation has been declining.