Domestic Economy

Inflation Drops Further

Inflation Drops FurtherInflation Drops Further

The declining trend of Iran's inflation rate is continuing, as the central bank's contractionary monetary policies along with lower spending by the government take effect.

The consumer prices in urban areas rose 11.3% in the 1394 Iranian year (ended 19 March 2016), down 3.5 percentage points from the previous year's 14.8%, the latest report by the Statistical Center of Iran shows.

Inflation in Iran's rural areas was more subdued. Prices rose 10.6% in 1394 in rural Iran, declining from 13.7% in 1393, the report shows.

The government's efforts to get its finances in order and the Central Bank of Iran's tactics to increase lending, while avoiding money printing, have been instrumental in subsiding inflationary pressures. However, the ongoing slump in global commodity prices, coupled with recession in the Iranian economy, which have hammered consumer spending, are also at play.

Nevertheless, the administration of President Hassan Rouhani has successfully bucked the trend and curbed the rampant inflation it inherited from its predecessor. Inflation was climbing steeply before 1393. The CPI climbed from 21.5% in 1390 to 30.5% in 1391 and peaked in 1392 (the year ending March 20, 2014) at a mind-boggling 34.7%, CBI data show.

Poor economic policy, sanctions and currency devaluation have been cited as the reasons for the spike in inflation during those years by economists.

Managing inflation has always been tough for Iranian governments and somewhat of an afterthought. Governments spent windfall oil revenues and loans from the central bank when that income fell short of covering their expenses.

The central bank's secondary role was to curb the inflation created by fiscal spending.

Inflation averaged 19.3% in the 40 years leading to the 1392 fiscal year. During that period, inflation dipped below 10% in only three years—the last time was 25 years ago. It exceeded 20% for 17 years out of 40.

CBI data also show that a dip in inflation below 10% has always been followed by a huge hike. This may be a telltale sign of things to come. However, Rouhani and his Economy Minister Ali Tayyebnia have vowed to bring it below 10% and keep it there.

The challenge here is that, as CBI chief, Valiollah Seif, put it, "inflation has reached structural levels" and further declines of inflation will be harder and slower. In other words, the government's fiscal spending model and money market regulations will need to go through a major overhaul.

This new year, the shifts in business and investment brought about by the lifting of sanctions against the Iranian economy will increase the inflow and outflow of money, affecting foreign exchange rates and, in turn, consumer prices.

Besides the Statistical Center of Iran, macroeconomic indices are also published by CBI, whose statistics differ from SCI's. For instance, the CBI reported an 11.9% inflation rate for the Iranian month of Esfand (ended March 19), whereas SCI put it at 11.3%. The central bank has yet to release its data for the last Iranian year.