It’s too soon for the government to declare victory in its fight against inflation, as it is going to be a long war and requires consistent, long-term action.
Iranian governments have a track record of inconsistent decision-making and focusing on the short term.
That is the essence of an editorial titled “Will Inflation Continue to Fall?” recently published in our sister publication Donya-e-Eqtesad by Iranian business journalist Ali Farahbakhsh.
The well-known mantra in journalism says the answer to any headline ending with a question mark is ‘no’. Works here, too.
The government started tackling inflation when it hit 45% year-on-year highs in 2013. The central bank pulled the brakes on monetary expansion, calling its policies “monetary discipline”, a nudge to prior administration’s reckless money printing.
At the core of central bank actions was a shift from printing cash to making more money available to banks for lending.
Tumbling global commodity prices and weak consumer demand in Iran played an important part in bringing down inflation. As a result, inflation fell to 11.2% in the 12 months ending April 19, which marks the end of the Iranian month of Farvardin, latest figures released by the Central Bank of Iran show.
Year-on-year inflation for Farvardin compared with last year’s similar month fell to 7.4%. Year-on-year inflation is used to forecast annual inflation, so the government advertised its drop below 10% as the end of rampant inflation.
“Now the question is: Should we celebrate the fact that we have finally beaten this chronic disease of 40 years, or we need to remain cautious about the future?” Farahbakhsh asks.
Governments managed to bring the Consumer Price Index down to a single digit twice in the past four decades. However, they also quickly abandoned policies enacted to curb CPI, leading it to bounce back in the following years.
The same thing could happen now. But even if the central bank holds its current course, inflation is waiting round the corner, Farahbakhsh contends.
Why? Because money supply, the entire stock of currency and other liquid instruments have been growing. The central bank has just shifted the growth from the most liquid components of the money supply like cash, coins and balances held in checking and savings accounts to less liquid ones.
M2—a measure of money supply that includes cash and checking deposits (M1) as well as near money—surged 28.7% in the 12 months to Feb. 19. During the same period, M1 grew only 10.2%.
The slowdown in the growth of M1 has brought inflation down, but it has also increased M2’s share of money supply. M1 share of money supply has fallen to 1/7 from a quarter four years before. M2 has long-term inflationary effects and will take a while, but it will sting nonetheless.
So, for inflation to fully stabilize near 10%, the government has to formulate a long-term strategy, one that precludes borrowing from the central bank and forcing banks to lower lending rates, irrespective of their financial state.
