Domestic Economy

Inflation Trend in Iran: Much Confusion About Nothing

Inflation Trend in Iran: Much Confusion About Nothing
Inflation Trend in Iran: Much Confusion About Nothing

Despite the fact that information about the speed at which prices rise is published regularly at the end of each month, there is a debate whether inflation is rising or falling. 
The facts are not in dispute, but their interpretation is. The monthly rate of inflation has slowed considerably in the last three months, but that is not the only way to measure inflation, economist Djavad Salehi Isfahani wrote in a new blogpost. The full text follows:
Prices rose by 12.2% in Khordad (May 20-June 21), 4.6% in Tir (June 22-July 22) and 2% in Mordad (July 23-Aug. 22). The equivalent annual rates (compounded over 12 months) are more dramatic: 299%, 76% and 26%, clearly showing a downtrend. If you believe inflation is the speed of price increase, there is no question that inflation has slowed considerably.
The monthly inflation in Khordad was unprecedented and understandable. It followed two shocks to food prices arising from the removal of subsidies for the import of essential commodities, mainly food items, and from the Russian invasion of Ukraine. 
Given the cost-push source of the recent rapid increase in prices, it is no surprise that inflation has slowed once the original shock has worked its way through the system. Whether inflation continues at the slower pace of Mordad will depend on other things, including the prospects for a nuclear deal.
But the question of the trend for the last three months should in principle be easy to resolve with existing data. The reason why it has not is because of different ways inflation is measured in Iran. There is the so-called point-to-point inflation, which is usually defined as the average rate of CPI growth for the past 12 months. This measure increased from 40.5% in Tir to 41.4% in Mordad. There is yet another definition of point-to-point inflation that SCI uses, and it divides this month’s CPI by the CPI of the same month of a year ago. This measure produces a higher rate, but it declined from 54.0% in Tir to 52.2% last month.
That’s all that the CPI data can tell us. 
Different measures tell somewhat different stories, but at least two indicate declining inflation. The monthly rate is the measure that I prefer for Iran’s turbulent economy, and one that I have used in the past to calm hyper-inflation fears stoked by the likes of Steven Hanke who has been proven wrong multiple times for predicting Venezuelan-style chaos in Iran.
The graph below, which is an updated version of similar graphs that have appeared in this blog, uses three-month moving averages to highlight the periodicity of inflationary pressures. The graphs reveal five bouts of high inflation, each caused by an external shock that raised prices suddenly but subsided a few months later. In between, you can see the underlying endemic rate of inflation, caused by lack of resources to meet various demands on public expenditures. 
Hyperinflation occurs when an external shock raises inflation, which is not displayed by this graph.

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