Domestic Economy

Single-Digit PPI Makes Debut

Single-Digit PPI Makes Debut
Single-Digit PPI Makes Debut

A single-digit Producer Price Index of 9.3% was recorded for the Iranian month of Shahrivar (August 23-September 22), figures released by the Central Bank of Iran show.

Studies show the PPI rose above 10% once the first phase of Subsidy Reform Plan was implemented in late November 2010 and it continued to rise to 38% in 2011—the highest in five years. PPI inflation grew smaller afterward, reaching 24% in late August 2012 but with the start of fluctuations in the foreign currency market in the same year, a staggering 46.1% PPI inflation was posted in late September 2013—an unprecedented peak since 1995, Financial Tribune’s sister newspaper Donya-e-Eqtesad reported.

Economic policies employed by the incumbent administration over the past two years, including curbing foreign currency fluctuations, have resulted in the reduction of production costs and consequently the fall of PPI. Even the implementation of further phases of Subsidy Reform Plan and energy price hikes in 2014 and 2015 did not lead to a constant change in PPI. The index continues its declining trend and has now landed in the single-digit territory.

Experts link three factors to the declining trend of PPI: stability or decrease of foreign currency rate, recession and low demand in the market and the impact of global falling prices. In fact, the stability of the nominal rate of foreign currency has led to a drop in the value of imports in terms of local currency.

Given the significant role of imported goods in industrial manufacturing, the decline in imports value has caused the PPI to follow suit. Another factor at play in the declining index is the amassed products in major entities.

Recent months have seen customers postpone their purchases in the hope of sanctions relief and its ensuing price falls. Also, the global falling prices of oil have decreased global prices of goods. Most countries are experiencing falling Commodity Price Index, the impact of which seems to have been mirrored in the local market and influenced PPI.

 Importance of PPI

The importance of PPI lies with its predictive content for the future pattern of Consumer Price Index. Changes in PPI are usually reflected in CPI within a short period of time.

PPI gauges the price fluctuations of goods and services for the producer whereas Consumer Price Index measures changes in the price level of a basket of consumer goods and services purchased by households. In other words, PPI is an index of prices measured at the wholesale, or producer level. It shows trends within the wholesale markets (as it was once called the Wholesale Price Index), production industries, and manufacturing industries and commodities markets from the perspective of the seller.

According to Investopedia, PPI can serve multiple roles in improving investment-making decisions because it can serve as a leading indicator for CPI. When producers are faced with input inflation, those rising costs are passed along to the retailers and eventually to the consumer.

Furthermore, PPI presents the inflation picture from a different perspective than CPI. Although changes in consumer prices are important for consumers, tracking PPI allows one to determine the cause of the changes in CPI. If, for example, CPI increases at a much faster rate than PPI, such a situation could indicate that factors other than inflation may be causing retailers to increase their prices. However, if CPI and PPI increase in tandem, retailers may be simply attempting to maintain their operating margins.

All in all, a decrease in PPI is one of the signs of a probable slow-down in the CPI in future months. Almost a perfect correlation exists between CPI and PPI.

 Latest CPI Figures

The goods and services Consumer Price Index for urban areas increased 15.1% in the 12-month period until September 22, which marks the end of the Iranian month of Shahrivar, compared to the same period of last year, according to the latest report by the CBI.

The overall CPI (using 2011 as the base year) stood at 225.7 in this period, indicating a 0.6% growth compared with the previous month. A year-on-year increase of 11.7% was registered in the index compared with the similar month of last year. Earlier, the Statistical Center of Iran put the inflation rate for the month of Shahrivar at 13.6%.

Also, the Consumer Price Index for rural areas of the same period increased 12.9% compared to the corresponding period last year—down 0.1% compared to a month earlier, the Statistical Center of Iran reported. The overall index (using 2011 as the base year) stood at 227 in Shahrivar, indicating 0.3% growth compared with the previous month. Year-on-year increase of 11.1% was recorded for the index compared with last year’s similar month—0.7% lower than the changes recorded in the preceding month. Figures by CBI on Consumer Price Index for rural areas have not been released yet.