Iran's Economy Ministry: Inflation to Rise Above 10%

EghtesadOnline: The Economy Ministry has predicted that the average inflation rate in the rolling year to the end of the current Iranian month (June 21) will rise above 10%.

News ID: ۷۷۶۵۷۲

28 May 2017

This will follow 11 consecutive months of single-digit inflation for the first time in about a quarter century.

The average goods and services Consumer Price Index for urban areas in the period, which marks the end of the Iranian month of Khordad, is expected to rise 10.4% compared with last year’s corresponding period, the Economy Ministry estimated in a report published on its website.

According to the latest data released by the Central Bank of Iran, inflation averaged at 9.84% for the last Iranian month (Ordibehesht), which ended May 21.

According to Financial Tribune, CBI put the inflation rate for the preceding month, which ended on April 20, at 9.5%.

The overall CPI (using the Iranian year to March 2012 as the base year) stood at 266.1 in Ordibehesht, indicating a 0.2% growth compared with the previous month. The index registered a year-on-year increase of 11.8% compared with the similar month of last year.

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”, “housing, water, power, gas and other fuels” and “health and medical care”. The three groups usually have the strongest effect on the indicator.

The Economy Ministry says “food and beverages” will be the biggest contributor to Khordad’s inflation, followed by “housing, water, power, gas and other fuels” and “health and medical care”.

In Ordibehesht, CPI for food and beverages recorded the highest increase of 17.6% year-on-year. It was followed by health and medical care (16.3%) and education (10.5%), CBI figures show.

A 10.4% inflation will mark the start of double digit inflation rate, about which officials and economists have already expressed concern.

After inheriting an inflation rate of near 40%, President Hassan Rouhani’s economic team halved the rate one year into office, pulling it below 20% in September 2014 and then to 15% in March 2015.

Iran’s inflation rate went below 10% for the rolling year ending June 20. This was the first time the country was experiencing single-digit inflation in 26 years.

Masoud Nili, a senior economist and top advisor to Rouhani, said earlier this year that a bounce-back of inflation to above 10% will hamper the outstanding growth figures the government has achieved and seeks to preserve.

Economy Minister Ali Tayyebnia has estimated that GDP growth in the fiscal 2016-17 stood at 8%. Official statistics on the whole year’s growth rate have yet to be published.

CBI’s latest report shows the Iranian economy grew 11.9% in the three quarters of last year (March 20-Dec. 20, 2016).

Experts attribute the rising inflation rate to a variety of reasons, including growth in the money base due to the government’s financial aid to banks to compensate for their bad loans.

Earlier this month, economist Seyyed Ali Madanizadeh warned that "inflation would jump if the Central Bank of Iran did not adopt preventive measures”.

According to the economist, a sharp drop in inflation often leads to a deep recession, but due to reduced inflationary expectations, the issue of recession was largely contained by the government and the economy recorded two consecutive years of positive growth.

Madanizadeh believes these achievements are at risk in the shadow of Iran’s troubled banking sector, which the government plans to fix, but failed in the face of a soaring budget deficit.

The Iranian banking sector’s ratio of non-performing loans stood at 11% by September 20, 2016, down from 13.6% in September 20, 2014, CBI Governor Valiollah Seif announced in January.

Interest rates have traditionally been illogically high in Iran, distancing from the general inflationary downtrend in recent years.

Piling NPLs force banks to compete to absorb capital from other banks as well as CBI with sky-high interbank lending rate to be able to fulfill their liabilities.