Iran Inflation Downtrend Slows

EghtesadOnline: The average inflation rate for the Iranian month Azar (ended December 20) stood at 8.6% almost unchanged compared to the previous month, implying that the indicator may be putting the brakes on its downtrend over the past months.

News ID: ۷۳۸۹۴۰

30 December 2016

The overall CPI (using Iranian fiscal year to March 2012 as base year) stood at 252.9 in Azar, indicating a 1.4% growth compared with the previous month—the highest over the past 18 months. Monthly CPI growth rate stood at 0.6% in the previous Iranian month Aban.

The average monthly CPI growth since the beginning of the current Iranian year (March 20) stands at 0.8%, which the government has called a “redline” that, if crossed, should be considered a wakeup call for marking a shift in monetary policies, according to an article in the Persian economic daily Donya-e-Eqtesad.

As a quick reaction to the rising price index, a point-to-point inflation of 9.2% was also registered in Azar, marking a slight increase compared to the 9.1% registered in the previous month.

The CPI represents the cost of goods and services across the country on a monthly basis, which is broken down to 12 major groups, including “food and beverages” and “housing, water, power, gas and other fuels”. The two groups have the strongest effect on the overall indicator, Financial Tribune reported.

The record high monthly growth of CPI is attributed to a 2.4% rise in “food and beverages” sub-indicator in Azar over the month before. This is while the indicator had remained unchanged during the month of Aban compared to its preceding month.

Although, traditionally, food and beverages witness an increase in prices by the end of fall every year, the unusual rise in the index could also be attributed to the depreciation of rial against the dollar in the past few months.

> Forex Factor

Tuesday saw Iran’s currency depreciate to 41,900 rials against $1–its lowest ever. Rial has lost more than 16% of its value against the dollar in the past few months.

While making Iranian exports more attractive to the world market, the depreciation will increase the cost of import, thus the higher prices for food and other products.

Over the past 10 years, Iran has seen the rial go from around 9,200 to 41,900 against $1, a depreciation of around 450%. Much of that collapse came in 2012, when sanctions were imposed on Iran’s oil industry.

Fluctuating foreign exchange rates have had a significant impact on CPI growth in Iran, as evident in the rising inflation after 2012, reaching as high as 46% during the last days of the previous administration.

On the other hand, since August 2013, when President Hassan Rouhani took office, the government managed to stabilize exchange rates. After a year, the government cut inflation to half and then pulled it below 20% in September 2014, and then to around 15% in March 2015.

The government now prides itself in having lowered inflation below 10% for the rolling year ending June 20 for the first time in a quarter century.

Stable exchange rates helped ease inflation in three ways. First, by stabilizing the prices of imported commodities. As imports account for a sizable portion of commodities involved in the consumer price index, steady exchange rates mean steady prices and thus lower inflation.

On the other hand, since prices of imported capital goods and intermediate goods are included in calculating domestic manufacturing costs, a steady rial against the dollar helps stabilize the cost of domestic production, hence keeping inflation in check.

Fluctuations in foreign exchange rates are one of the main reasons behind inflationary expectations in Iran, which in turn have a short-term effect on inflation. Soon after the exchange rates went through a steady phase two years ago, inflationary expectations tempered and consequetly inflation subsided with it.

> Monetary Factor

Other contributing factors to inflation include growth in broad money and the central bank’s monetary base, whose growth rates hover around 30% and 20% respectively.

In the past few months, the government has forced down interest rates resulting in a shift in the type of bank deposits from long-term savings to sight deposits, which contributed to broad money growth.

In March 2014, the beginning of last Iranian year, the economy posted a broad money growth rate of around 25.3%, decreasing from the 30% registered a year before.

The number further shrank to 22.3% in March 2015 showing a slow and gradual pace in contraction of liquidity. This changed a few months back when the government adopted an expansionary monetary policy to stimulate demand and move the industrial sector out of recession.

International Monetary Fund in its latest report predicted Iran’s inflation to average about 9% in 2016-17, before temporarily rising to just over 11% in 2017-18 due to the pass-through from recent exchange rate depreciation.

“The challenge now is to create the conditions for sustained macroeconomic stability and growth. Comprehensive and coordinated reforms that seek to defend low and stable inflation, restructure and recapitalize banks, cast fiscal policy in a medium-term framework to support reforms and prioritize legal and regulatory changes that facilitate investment, aid job creation and improve governance. Better data quality, availability and timeliness would support the reform process,” the report reads.

“Prudent fiscal policy and liquidity management are critical to keep inflation low and stable. The government should sharply reduce its directed credit schemes and adjust regulated prices to curb liquidity pressures.”

According to the statement, the central bank requires greater independence and better tools under the new Central Bank Bill to sustain low and stable inflation.

The IMF mission has also welcomed Iranian authorities’ commitment to unify the exchange rate and return to a managed float. It recommends that this proceed expeditiously to ensure flexibility to manage shocks.