Tyranny of numbers

Inflation reporting in Iran

Posted in General, Macroeconomy by Djavad on April 4, 2013

The statistics most readily available for Iran are about prices, yet they are seen as the least believable.  Last week the Statistical Center of Iran that reports on unemployment, household budget and national income, and  now claims to be the official source for reporting on inflation, published a report providing us with detailed information on prices for the last six years (2007-2013).  It shows that the consumer price index (CPI) rose by 40.6% during the Iranian year 1391 (21 March 2012 to 20 March 2013), and the average index for 1391 was 31.5% above 1390.  The former is the point to point inflation, what people feel, and the other is what is officially reported as the years’ inflation. (more…)

Inflation and money supply in Iran: a closer look

Posted in General, Macroeconomy, Sanctions, Subsidy reform by Djavad on February 11, 2013

Last week, in a post on the Lobelog.com I noted further signs of moderating inflation.  Prices in the Iranian month of Dey (ending 20 January 2013) rose by 1.7%, compared to 2.5% the month before and 4.5% per month in the previous two months after devaluation.  These are high rates of inflation on an annual basis (see chart below), but a sign that the Central Bank may have found a way to keep the growth of money supply below the rate of inflation.  I was curious enough if this were the case to look up money supply data published by the Central Bank and here is what I found.  For the quarter that ended on December 20, 2012, which covers the three month period after devaluation, the rate of growth of money supply was 20 percentage points below the rate of inflation. (more…)

Iran’s Inflation showing signs of moderating

Posted in Inequality, Macroeconomy, Poverty, Sanctions, Subsidy reform by Djavad on January 10, 2013

The Central Bank of Iran has just released the Consumer Price Index for the month of Azar (ending on November 20, 2012), and it shows a much smaller increase in prices than the previous two months.  The index rose by about 4.5% per month during the last two months (equal to 70% annually), but its pace moderated in Azar, rising by 2.5%.  This is still a sizable increase (about 35% annually), but it may be a sign that the large devaluation of the rial during the last week of September has run its course and consumers maybe back in the territory that, unfortunately, they have come to regard as normal: prices rising by about 20% per year.  This is, of course, conditional on no new shocks happening to the exchange rate or the money supply in the near future. (more…)

Prices in Iran and what they mean for the PPP exchange rate

Posted in General, Macroeconomy, Sanctions by Djavad on November 4, 2012

As I have argued in this blog and elsewhere, there is not a single equilibrium exchange rate for the rial. If you believed my rough calculations in my previous post, and if you needed to report only one number, the exchange rate would be something around 20,000 rials per dollar (about 96.5% increase over the old exchange rate of a little over 10,000). The next best thing after an equilibrium exchange rate (ER), one that is actually more useful for welfare comparisons, is the Purchasing Power Parity ER. Here are my back-of-the-envelop calculations of the PPP rate for Iran in 2012.


Rial devaluation and inflation — without the hype

Posted in General, Macroeconomy, Sanctions by Djavad on October 29, 2012

For the past several weeks, the rapid fall of the rial has been linked to hyperinflation and a possible quick end to the impasse in nuclear negotiations with Iran. Inflation estimates of 196% per year in NYT, 70% per month in Boston Globe, and similar reports in Washington Post and Bloomberg, were all traceable to an article in the Cato website that had prematurely added Iran as the 48th worst case of hyperinflation in the world. Some commentators could hardly hide their joy in the prospect that sanctions were finally, and mercifully, about to spare the Middle East yet another war and the Iranian people years of suffering under sanctions. But these predictions have failed to materialize, and the media interest in the issue has waned. We are slowly hearing the other story of the rial devaluation, its positive effect on local production (see, for example, Jason Rezaian’s informative report in Saturday’s Washington Post).


More on the falling rial

Posted in General, Macroeconomy, Sanctions by Djavad on October 5, 2012

I have not been able to write much on this blog because I have been trying to catch up on my research.  But the rial troubles in the last two weeks have been impossible to ignore.  I am not a macro economist, but some of what the media was reporting about the freefall of the rial even I knew was over-sensationalized — hyperinflation, economic collapse… and one Iranian BBC reporter said he had run out of words to describe it!  Yesterday I tried to explain on the lobelog three things. (more…)

Iran’s subsidy reform survives crucial hurdle

Posted in Inequality, Macroeconomy, Poverty, Subsidy reform by Djavad on May 21, 2012

What is described as the second phase of Iran’s Targeted Subsidy Program appears to be on its way to implementation after the parliament approved to increase the size of the program to 660 trillion rials (about $54 billion using the official exchange rate), denying the government its request for a much larger program (1,350 trillion or $100 billion).  The compromise allows the government to increase prices of subsidized goods and at the same time raise the monthly payment of cash to families by an as yet undetermined amount.  Some reports suggested that the current cash rebate of 450,000 rials per person per month could increase by as much as one third for the remainder of this year, which ends on March 20, 2013.  The timing of the second phase is unknown but there is no doubt that it will happen.  Getting the parliament to authorize the second phase means that the subsidy reform program has passed a crucial test, all the more because the economy is under stress from the effects of past inflation, sanctions, and general macroeconomic mismanagement.  The critics who wanted to stop the program on its tracks have had a field day in pinning various failures onto the reform program.  For the time being they seem content with having slashed its extravagant proposed budget. (more…)

The fall of the Iranian rial: too much of a good thing?

Posted in General, Macroeconomy by Djavad on January 3, 2012

In Tehran’s volatile currency market the rial fell to its lowest level ever today (January 2, 2012), the US dollar closing above 17,000 rials.  The devaluation of the rial that started at a gradual pace over a year ago, and was largely expected and welcomed by economists, accelerated, going from less than 11,000 to around 15,000 rial per dollar in a matter of weeks.  The additional fall in rial of about 10% in the last two days raises the question if the correction has gone too far.  To answer this question one needs to have some idea of what is the right rate of exchange for Iran’s currency, something that you are unlikely to find in standard economics textbooks.  There are two reasons why the market clearing price is not a good guide to the value of the rial: sanctions and oil.


Anniversary blues for subsidy reform

Posted in General, Inequality, Macroeconomy, Subsidy reform by Djavad on December 21, 2011

The anniversary of the subsidy reform, on December 20, 2011, arrived with fireworks, but not the kind the government had hoped for.  In a day that President Ahmadinejad was addressing a conference of the first anniversary of the subsidy reform in Tehran, the rial fell by more than 5%, breaching the psychological 15,000 rials per dollar barrier.  These two events are more than coincidentally connected.  The rial has been weakened by the inflation unleashed by the subsidy reform, a cost of the reform that was both foreseen and justified.  At the same time, the precipitous devaluation of the rial adds to uncertainty and macroeconomic instability that can undermine the subsidy reform.  The real benefit from the reform derives from reduced demand for energy, which can only happen if households and firms are willing to change their behavior and invest in energy saving equipment, which in turn requires confidence that the post-reform energy prices will not be washed up in some cycle of inflation and devaluation.  Remember, unsubsidized energy prices are equal their world prices multiplied by the exchange rate.  With 15,000 rials to the dollar, gasoline (at 4000 or 7000 rials per liter) is 50% cheaper than it was a year ago when the new price was set, and is once again subsidized.   (more…)

The trouble with rial

Posted in General, Macroeconomy by Djavad on July 25, 2011

Iran’s currency, the rial, is about to change if not disappear altogether.  Iran’s Central Bank is seriously considering taking 4 zeros out of the embattled currency, and even changing its name, perhaps to something Persian sounding like parsi.  Neither of these two actions, if they come to pass, deal with the real trouble with rial. I am all for taking the zeros out, and could go along with the name change if that would help people forget that the new rial is the old rial 160 times less valuable (compared to 1977).