MRC Looks at Retail Inflation

EghtesadOnline: The Majlis Research Center in a report explored the main reasons behind the sharp increase in consumer prices in the second quarter of the current fiscal year (June 21-Sept.21).

News ID: ۷۵۱۶۳۱

05 December 2020

"The Consumer Price Index rose by 14.07% on a quarterly basis, which is the highest in the past four quarters,” the MRC said in a report published on its website.

Citing data from the Statistical Center of Iran, the parliamentary think-tank said in the 12-month period ending Sept. 21, the CPI increased by 26% compared to last year.

Inflation for the month ending Sept.21 jumped 34.4% compared to the same month a year ago. Year-on-year inflation in the preceding month (ending Aug. 21) was 30.4%.

The report pointed to the government budget deficit as the prime factor that has contributed to galloping inflation. Budgetary problems were followed by the historic increase in currency rates and expansion of money supply, which the MRC said were the short and long term drivers of inflation.

"Rising inflation expectations were one of main reasons behind CPI growth in summer [Q2], which is conspicuously reflected in increase in the share of money (M1) in the composition of money supply," the MRC said.

Broad money supply reached 28,958.9 trillion rials ($115 billion) at the end of the H1 up 36.2% compared to the same period last year. The share of money (M1) was 6,007 trillion rials ($24b) by Sept. 21 -- up 80.2% year-on-year. M1 increased 40.6% in H1.

M1 refers to highly liquid assets, including physical currency and coins, demand deposits, traveler checks, other checkable deposits and negotiable order of withdrawal (NOW) accounts.

M1 contributed to 20.7% of the total money supply in H1, the highest in seven years. It was 17.3% at the end of last fiscal year on March 19.

On the flip side, the share of quasi-money, or M2, in money supply declined from 82.7% in mid-March to 79.3% in H1.

"Rising inflation expectation due to the ballooning money supply has strongly swayed the [peoples’] unwillingness to keep money (as the highly liquid and inflationary component of money supply)" in banks.

Steep increase in foreign exchange rates is also one of the main driving forces behind higher inflation which has impact CPI and the Production Price Index.

Forex Rates

Forex rates in the secondary market, known as Nima, increased by 40% in summer and pushed up the price of "durable goods" by 34%.

Nima is a trade platform where exporters sell their overseas earnings to importers. One dollar in Nima is worth 225,000 rials.

According to the MRC, "when inflation expectation is high long-term bank deposits increasingly turn to sight deposits, which obviously is directed to financial markets".

As per data released by the Central Bank of Iran, total sight deposits rose by 2,572.5 trillion rials ($10.2 billion) in the period ending Sept. 21 to 5,407.4 trillion rials ($21.6b) -- a whopping 90.7% annualized growth.  Sight deposits rose 47.7% in the six months.

This is while term deposits had a slower pace with 28% annual growth reaching 22,951.9 trillion rials ($92b) and term deposits posted 12.2% growth in H1.

Steep volatility in financial markets is a consequence of the increase in sight deposits seen in the flood of liquidity in the stock market from March to August followed by the unsurprising exodus to the currency and gold markets.

Fearing that inflation could eat away at their rial assets, an increasing number of savers were and are moving to other financial markets.

The MRC implicitly criticized the government’s near permanent insistence at the start of the current fiscal year to boost the stock market and attract the people’s savings “to help improve manufacturing and economic growth.”

Suggestions to Policymakers

On monetary policies, the think tank recommended policy and decision makers to adopt measures to control inflation expectation and "curb access to financial resources for speculative trade in financial markets". Curbing the expansion of balance sheets of banks and credit institutions is one way in this direction, it said.

In addition, the CBI needs to exercise stricter supervision over banks' and their transactions. Regarding the recent government decision to tap into the National Development Fund of Iran, the sovereign wealth fund, to boost the stock market, the MRC strongly recommended the Rouhani administration against such seemingly unwanted and unhelpful measures.

There is a plan that calls for 1% of NDFI reserves to be transferred to the Capital Market Stabilization Fund to help mitigate the credit crunch in the bourse that has a taken a drubbing since early last month. Stock market authorities say 10 trillion rials have so far been deposited and more is to come.

With regard to financial policies, the MRC called on the government to reconsider income and revenue when preparing the budget, cut spending and find new sources of revenues such as raising taxes.

The MRC welcomed the government policy to sell bonds and avoid printing money for funding the budget deficits. However, this would not be effective in the long term because "it only postpones inflation to the future. The best way forward at this stage is to control spending and increase revenue.”

On the ubiquitous role of the currency market in inflation expectation, the advisory body urged the CBI to minimize volatility in the forex market to the best of its ability.