These days, Iranians are feeling the pain of high prices with their skin, flesh and bones.
They are up against a new round of price hike for protein and dairy products, fruits, vegetables and other goods and services.
Moreover, rumors are circulating about an impending increase in gasoline price that would impact all markets with its inflationary effects, when that happens. I believe that decoding the reasons behind such economic propositions requires accurate and unbiased evaluations.
Vahid Shaqaqi-Shahri, an economist, prefaced his write-up for the Persian daily Ta’adol with this note. A translation of the text follows:
Inflation is the root of many problems, hence the most important economic goal should be to contain inflation.
If the government fails to control inflation, price shocks will first affect the asset market and then other markets. In other words, inflation and inflationary expectations first impact foreign currency, gold, car, housing and the capital market and then other goods and services market, i.e., the consumption market of Iranian households after three to six months.
For example, the US dollar appreciated against the rial last winter and even hit 600,000 rials. This uptrend started from below 400,000 rials and reached 600,000 rials in winter. It was clear from the beginning that the rise in the dollar rate will first appear in the asset market. Subsequently, the prices of gold coin, housing, cars and even stocks registered a significant growth. But this was not the end of the story; the price tsunami spread to goods and services sectors. As a result, the impact of the price growth manifested in the market of goods and services after a three-month break. That’s why the prices of chicken reached 800,000 to 900,000 rials per kilogram and the prices of meat, eggs and other consumer items followed suit.
Bear in mind that the rise in the exchange rate creates another problem that emerges in the energy sector. Gasoline and diesel are priced at higher rates in neighboring countries. On average, the price of gasoline in neighboring countries is between 70 cents and $1.5. When the local currency depreciates, the difference between the price of gasoline in Iran and neighboring countries widens, which escalates the smuggling of gasoline, diesel and other energy items.
When this happens, the Iranian government has to raise energy prices, which always leads to social and political tensions. A significant number of people in Iran work as taxi drivers on the side, while a vast range of commodities are transported by truck to reach consumers. Therefore, gasoline and diesel price hike will affect all goods and services.
Repercussions
What will happen if the governments in Iran do not raise energy prices? In that case, the government will have to bear heavy pressure in using its scarce foreign exchange resources while turning a blind eye to the rampant fuel smuggling along its border.
As we speak, the current price of a liter of gasoline in other neighboring countries is 500,000 rials, while it is being sold at 30,000 rials in Iran.
The depreciation of local currency is at the root of this gnawing gap; fluctuation of foreign currency is, in turn, being impacted by inflationary shocks. Therefore, as said before, the root of Iran’s economic problems is inflation. If the government fails to control inflation, it cannot prevent the depreciation of the rial and the prices of other consumer items, assets and energy carriers.
The government is currently trying to tax capital gains. However, the government should not penalize people for buying property. People buy assets to safeguard their purchasing power, so the government cannot fine people for its own handiwork, i.e., inflation. The root of the decline in the national currency’s value is inflation. As long as the government fails to control inflation, the dollar exchange rate and consequently the prices of assets, goods and services will rise.
The difference in energy prices is formed both inside and outside, and leads to the huge fuel smuggling and waste of resources. When the government is forced to raise the price of gasoline to balance the price of domestic and foreign energy, the price of fuel transportation and the cost of goods and services also increases.
Therefore, all efforts should be made to contain inflation. If the government cannot achieve this goal, they have to bear its costs. Under the circumstances, public dissatisfaction will increase and the gulf between the government and the nation will widen.
Inflation will be curbed by reforming the economic systems, along with the reform of the macro decision-making system, concerning domestic and foreign affairs.
