By surveying the inflation of the past few years, in view of the designation of the new Iranian year after “Inflation Control and Production Growth” and the recent targeting of inflation reduction by the Central Bank of Iran’s governor, economist Mahmoud Baghjeri has sought to examine the issue of inflation in Iran in an article for Donya-e-Eqtesad. A translation of the text follows:
Inflation in recent years has reached an unprecedented level that people are feeling it with their skin and flesh, and every time they go to buy food, fruit and other goods, they feel its bitter taste. But why does inflation really occur and why can't it be controlled? Why don't government officials check inflation? Probably, all the officials have decided to solve the dilemma but the point is that solving inflation is not an easy task and has no quick fix. Controlling inflation is a time-consuming process that must be managed gradually. Inflation and its management have been discussed in detail in the books on economics, and students are familiar with the issues related to inflation from the first days of their undergraduate course. Therefore, academic solutions are also available. However, making the theory work is not easy.
Root Cause of Inflation
Before pointing to the solution, it’s worth noting that unfortunately, over the past 50 years, inflation in Iran has been on the uptrend. Therefore, in the first step, all efforts should be focused on bringing the current inflation level to its long-term average, not the average of the last five years. Therefore, bringing inflation below 10% is unattainable. We must know that the main cause of inflation in Iran is the lack of balance between income and expenditure; that is, at the macroeconomic level, consumption is higher than the production and income capacity. The imbalance triggers money printing to eliminate the existing gap. Therefore, the volume of liquidity increases. The same recurring issue is the main reason for inflation and the rise in liquidity. Of course, the outbreak of inflation has other reasons, and in order to sum it up we have restricted ourselves to its punchline. Now that we know the main cause of inflation, we will go for its solution. Anything that helps correct the imbalance mentioned above can be effective in curbing inflation. We examine this issue in two dimensions: political and economic.
Political Dimension
In the last 20 years, nuclear energy is the most important political issue facing the country. Sanctions resulting from this issue have caused Iran's economy to face many problems, including restrictions on oil exports and the freezing of the country's foreign exchange revenues overseas. Nuclear negotiations that led to the Joint Comprehensive Plan of Action were able to partially solve some of the economic bottlenecks and boost hope in the future among economic players. But unfortunately, the withdrawal of the United States from the nuclear agreement, which led to its suspension, diminished its positive effect on the economy. Therefore, any kind of agreement in this regard by creating new openings can improve the country's income and improve the above-mentioned imbalance, which will reduce the unsupported money printing, improve the economic situation and reduce the inflationary condition.
Economic Dimension
In terms of economic decisions, the work is difficult, complex and time-consuming. The reason we use these frustrating terms is that inflation has an endogenous engine that is hard to control. Let's go back to the main sentence of this note: "The main cause of inflation in Iran is the lack of balance between income and expenditure." Therefore, the solution is to reduce costs. The real way to fix imbalances is by taking real decisions. For example, one of the sources of inflation is the state of pension funds. If a law is enacted tomorrow, based on which the retirement age will be increased, what would be the people’s reaction? Another source of inflation is the rise of employees’ salaries. If the pay raise is too little, the reactions are predictable. These two cases are examples of the difficulty of decision-making for politicians who, in addition to the difficulty of solving problems, also have to grapple with reelection, maintaining a hold on power, etc. So, perhaps the optimal choice for the policymaker is to continue to tread the previous path and delay difficult decisions. The reality of economic decisions is that every decision has a cost, and the policymaker must examine the economic decision in the framework of cost-benefit analysis. Examining the economic decisions of CBI officials, as the helmsmen of inflationary decisions, confirms that the decisions are aimed at controlling the volume of liquidity and checking inflation. Among these decisions, we can mention attempts to control the growth of bank lending and the requirement to comply with it, as well as the increase in the bank interest rate. These two are considered classic solutions to control inflation in economic texts. In fact, a significant number of other economic agents, including stock market players, banks and companies, are critical in making these decisions, which I believe are unhelpful and even harmful. For this reason, I said at the beginning of this note that reducing inflation is a very difficult task, because many endogenous factors tend to increase liquidity. In any case, tough decisions have to be made to solve the inflation that has horribly damaged the economy. The duty of all practitioners and professors, as well as the media, is to support the right decisions and explain the difficulty of the dilemma to the people.
