Fuel Price Hike: An Overblown Fear of Inflation?

EghtesadOnline: Concerns that a proposed upsurge in fuel prices would drive up inflation by 8%, as projected by some economists, are probably overblown, Deputy Economy Minister Hossein Mirshojaiyan said on Wednesday.

News ID: ۷۸۱۱۵۹

14 January 2018

The ministry says the government's proposed 50% rise in fuel prices to hike gasoline price to 15,000 rials (34.8 cents) and diesel price to 4,000 rials (9.3 cents) per liter would lead to a maximum of 1.5% rise in inflation rate, while the Planning and Budget Organization and the Central Bank of Iran have projected a 2% rise.

“These assessments suggest that a rise in fuel prices won’t bring about an inflationary wave,” Mirshojaiyan was quoted as saying by IRNA.

As per the budget bill for the upcoming fiscal year (March 2018-19), the government is estimated to invest 174 trillion rials ($4.04 billion) in the production sector and create 634,000 jobs by reforming the subsidized energy prices, Financial Tribune reported.

“In 2014-15 when the inflation rate was 30%, gasoline prices increased from 3,000 rials (6.9 cents) to 10,000 rials (23 cents), but the government managed to beat inflation to around 10% using different monetary tools. The experience of past years shows that the inflationary impact of the rise in pump prices could be offset over seven to eight months to reach equilibrium,” Mirshojaiyan said.

Chairman of Majlis Economic Commission Mohammad Reza Pour-Ebrahimi, however, has a different opinion.

“Despite the primary objective specified for the Targeted Subsidies Law (lending support to production and boosting employment), the rise in energy prices led increased final cost of industrial units, particularly energy-intensive industries,” he said.

As part of the Subsidy Reform Plan, the government of President Hassan Rouhani’s predecessor removed food and energy subsidies in 2010 and instead paid 455,000 rials ($10.5) to each and every Iranian on a monthly basis. The move, as well as other flawed policies of the previous administration, led to dramatic rises in inflation rates. A point-to-point inflation of 45% was handed to Rouhani in June 2013 by his predecessor.

However, Rouhani managed to gradually rein in the runaway inflation rate and bring it down to a single digit territory for the first time after about a quarter century in June 2016. The rate has been hovering around 10% ever since.

Noting that the parliament is highly likely to keep fuel prices unchanged, the lawmaker noted that fuel inflation will creep into inflationary expectations and have direct and indirect impacts on people’s expenditures.

“Inflationary expectations are even more destructive than inflation itself. The government has only put forward the idea of increasing the gas and diesel prices, yet we are already witnessing price moves for some items and services,” Mehr News Agency quoted him as saying.

Inflation expectation is the rate of inflation that workers, businesses and investors think will prevail in the future, which they will factor into their decision-making.

Mehrdad Lahouti, who represents the northern city of Astaneh in the Iranian Parliament, told ILNA that the government does not need the parliament’s green light to raise energy prices, yet legislators have put forward a number of suggestions like different and higher fuel prices in Tehran compared to other provinces to reduce air pollution and boost public transportation cost.