Reasons Behind Slowdown in Inflation Scrutinized

EghtesadOnline: The advance in consumer prices slowed noticeably in the five-month period ending Sept. 22, prompting discussions about what led to this change.

News ID: ۷۴۸۵۵۲

28 September 2019

The single-digit average Consumer Price Index growth posted for 27 months since the third Iranian month of 2016-17 entered the double-digit territory in the fifth month of 2018-19 due to the significant drop in the value of Iran's national currency following the reimposition of sanctions by US President Donald Trump.

The Iranian rial lost about two-thirds of its value against the dollar in the last fiscal year (March 2018-19).

The US walked out last year of the nuclear deal Iran signed with world powers in 2015. The deal known as the Joint Comprehensive Plan of Action saw the removal of years of international sanctions against Iran. In exchange, Tehran agreed to limit the scope of its nuclear program. Washington's unilateral move last year, however, reignited tensions and reinstated a series of economic sanctions against the Islamic Republic by the United States described as "toughest ever". After waiting for nearly a year for Europeans to compensate the economic losses inflicted by the sanctions without any success, Iran restarted its nuclear program recently in a phased manner after it became apparent that JCPOA had failed to provide it with the advantages promised by the Europeans in the absence of the US, according to Financial Tribune.

Last week’s release of the Statistical Center of Iran data on the Consumer Price Index showed that the monthly growth of the index fell to an 18-month low in the sixth month of the Iranian year.

The overall CPI (using the Iranian year to March 2017 as the base year) stood at 181.7 last month, indicating a 0.5% rise compared with the month before. The consumer inflation registered a year-on-year increase of 35% and the annual growth of 42.7% last month.

The Persian daily Iran has enumerated the reasons behind the slowdown of inflation in Iran as follows:

Budgetary Adjustment and Rial Stability

The budget agreed by the Iranian Parliament and the government in March capped government spending in the current Iranian year to 4,490 trillion rials ($39.55 billion). The budget ceiling, however, was reduced to 3,860 trillion rials ($34 billion) as per the joint decision by the heads of the three branches of power after the significant decline in oil revenues.

The implementation of contractionary monetary policies and reduction in government spending are one of the main aspects of the reining of runaway inflation in Iran.

The marked decline in Iran's ability to sell oil in global markets as a result of the new round of sanctions–at least through official channels–did a number on the government's coffers.

Authorities have scrambled to make up for the deficit by adjusting the budget.

Unlike last year’s considerable fluctuations, a relative stability has been achieved in the value of Iranian currency in recent months.

The exchange rate of the Iranian rial has remained below 120,000 against a US dollar for months now.

Decline in Imports

Another cited reason is the decline in imports, which means less foreign currency was spent and reserves were maintained.

The paper pointed to data provided by the Ministry of Industries, Mining and Trade, which shows the first quarter of the current fiscal year (March 21-June 21) saw a 9% decrease in imports compared with the similar period of last year.

Additionally, Import Price Index, an economic indicator measuring real output in various industries, with industrial production and capacity levels expressed as an index level relative to a base year, in terms of rial, stood at 2017.3 in Q1, registering a 34.6% increase compared with the preceding quarter. This comes as IPI grew by 39.9% in Q4 of last year.

Latest available data show non-oil imports hit 14.12 million tons worth $17.73 billion during the same period, indicating a decline of 0.11% in weight and of 6.83% in value year-on-year.

Top exporters to Iran during the five months to Aug. 22 were China with $4.28 billion and a share of 24.16% from Iran’s total imports; the UAE with $3.04 billion and a share of 17.13%, Turkey with $2.21 billion and a share of 12.51%, India with $1.87 billion and a share of 10.55% and Germany with $865 million and a share of 4.88%.

By “non-oil”, IRICA refers to all commodities, except crude oil. Therefore, oil-driven products and byproducts as well as petrochemical products are still categorized as non-oil.

IRICA categorizes non-oil exports into three groups of “petrochemicals”, “gas condensates” and “others”.

Sluggish Demand for Foreign Currency

The creation of Integrated Forex Deals System (locally known as Nima) amid last year’s widest fluctuations of currency exchange rates helped reduce demand for foreign currency.

This came after a big gap between the exchange rates of government subsidized currency and that of open market had fueled inflated demand for foreign currencies, the dollar and euro in particular.

Decline in Speculative Practices, Inflationary Expectations

Price fluctuations last year had given rise to speculative activities in the forex market which, in turn, resulted in unreasonable increases of prices in other markets.

The stability of forex rate has spread to other markets through its impact on prices and reduced grounds for speculative activities.

Many traders tried hoarding commodities amid the devaluation of the currency, leading to increased prices and shortage of commodities and, of course, increased inflationary expectations. This was counteracted by authorities using police intervention for raiding warehouses and redistributing goods.

With a decline in inflationary expectations, demand for consumer goods has waned substantially and led to calmer markets.

Consolidation of Gov’t Prices, Supply of Essential Goods

The prices of goods and services provided by the government have switched direction from rising to falling in recent months.

Electricity, water, natural gas and other fuels’ prices have remained unchanged, not allowing a further increase in consumer price index.

The government’s sustained efforts to provide essential goods and build up the country’s reserves resulted in a 78% growth in imports of essential goods, including rice, meat and livestock feed at Imam Khomeini Port in the southern Khuzestan Province in the first quarter of the Iranian year.

Latest available data show 11 million tons of essential goods were imported into Iranian ports during the first five months of the current fiscal year (started March 21).

The volume of imports indicates a 67% rise compared with last year's corresponding period.

Imam Khomeini Port has been at the forefront of essential goods imports. Close to 7 million tons of essential goods, including barley, corn, oilseeds, sugar and vegetable oil, were unloaded at the port located in the southern Khuzestan Province during the period under review, indicating a 64% increase year-on-year.

PPI Slowdown, Output Growth

Changes in Producer Price Index are of particular interest, as they are usually reflected in Consumer Price Index within a short period of time.

PPI increased 0.7% in the month ending Aug. 22 compared with the month before. That is a relatively slower growth compared with previous months’ increases of up to 6%.

Year-on-year PPI growth registered for the month ending Aug. 22 was also eight percentage points less than that of the fiscal month ending July 22, suggesting that production costs have reached a degree of stability.

The Statistical Center of Iran's latest report shows the overall Producer Price Index (using 2011 as the base year) stood at 471.4 in spring (March 21 to June 21), indicating a 14.4% increase compared with the previous quarter’s index and 69.5% growth over the same quarter of last year.

Producer inflation in the four-quarter period ending June 21 (annual inflation) grew by 58.6% compared with the same period of last year.

The index calculated for the four-quarter period leading to March 20, 2019, the end of last fiscal year, increased by 47.5%.

Another contributor to the slowdown in inflation has been the improvement in domestic production.

According to Central Bank of Iran’s Governor Abdolnasser Hemmati, the first quarter of the current Iranian year saw a 5.6% rise in the output of industrial enterprises.