Why do commodity prices fail to stabilize despite the depreciation in foreign exchange rates? This is a question Hadi Haqshenas endeavors to clarify in a write-up for the Persian daily Etemad.
Price stickiness, or sticky prices, is the resistance of market price(s) to change quickly, despite shifts in the broad economy suggesting that a different price is optimal.
"Sticky" is a general economics term that can apply to any financial variable that is resistant to change. When applied to prices, it means that the sellers or buyers of certain goods are reluctant to change the price, despite changes in input cost or demand patterns.
A translation of the article follows:
As soon as the dollar appreciates against the rial, the prices of goods and commodities increase but when it devalues, markets do not budge an inch and prices stay put. President Ebrahim Raisi enquired about the reasons behind this ambiguity, particularly in the runup to the new Iranian year [starting March 21], during his last meeting with his economic team.
Economists use the concept of price stickiness to explain this situation. Price stickiness indicates a special anomaly in the economy and markets. An economy faced with price stickiness suffers from inefficiency in the supply and demand system on the one hand and the lack of reassuring political propositions, including sanctions and inflationary expectations, on the other hand.
An economy faced with price stickiness suffers from inefficiency in the supply and demand system on the one hand and the lack of reassuring political propositions, including sanctions and inflationary expectations, on the other hand
This uncertainty has become institutionalized in the Iranian society; people believe that prices would never decline and keep increasing as a result of unstable economic variables. The prices of many goods and services that are not directly impacted by the peaks and troughs of exchange rates go up just as the dollar gains value.
People say even chickens sell their eggs to farmers at higher prices when the exchange rate increases! This comes as the fluctuations in exchange rates were less than 10% in the current fiscal year [March 2021-22]. Because of this relatively small change, people expect to see inflation growth to stop and prices to stabilize or decline.
However, the main problem seems to lie in the system of supply and demand. In other words, although the exchange rates have reached a relative stability, prices continue to increase because of the problems with supply. For example, if the ban on car imports remains in place and local car makers fail to improve their production, you shouldn’t expect prices to drop despite the decrease in exchange rates. That’s because the supply of cars is not balanced with demand.
Economic developments are rooted in the system of supply and demand. Absent balance in this system, you can’t expect markets to stabilize. It is supply and demand that constitutes the main pillar of prices in the market; other factors remain on the margins of this pillar.
There is another proposition that affects market fluctuations, besides supply and demand. Foreign exchange rates rocketed immediately after the withdrawal of former US president, Donald Trump, from the Joint Comprehensive Plan of Action in 2018. The prices of goods and services increased afterwards.
But in the fiscal 2015-16, following the nuclear agreement, although the exchange rates were on the decline, prices resisted pressure to decline. All these show that the end cost of an item is affected by both real economic variables (supply and demand system) and non-economic or political variables (sanctions). If the parliament lifts the ban on imports of cars during the fiscal 20122-23 budget process, the downward trend in car prices is likely to start. This change indicates the impact of non-economic factors on the overall structure of markets. Therefore, in order to regulate prices, it is necessary to pay attention to economic factors such as supply and demand, apart from increasing legal supervisions and making efforts to resolve non-economic problems like sanctions.
By combining these measures, we can hope that the unbridled rise in prices would stop and the Iranian markets would stabilize.
