Despite the government’s successful efforts to reduce inflation from 45% to around 15% over the past two years, some have voiced concern that the administration’s focus on pulling down inflation could hurt the economy.
One of the top priorities of the government, since President Hassan Rouhani took office in 2013, has been to achieve a single-digit inflation rate. Indeed, the latest statistics of the Central Bank of Iran show the objective is likely to be fulfilled in the near future, Eghtesad News reported.
Earlier, the CBI announced that the Iranian month ending Sept. 22 registered a single-digit Producer Price Index of 9.3% for the first time in recent history. The PPI had peaked at 38% back in 2011, raising serious concern among experts and policymakers.
The importance of PPI lies in 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.
Therefore, a decrease in PPI is a sign of a slowdown in CPI in future, as almost a perfect correlation exists between CPI and PPI.
Critics of the government’s inflationary policies argue that a further reduction of the inflation rate would deepen the recession facing the industrial and manufacturing sectors. They believe low inflation rate would block the way for reaching high growth rates, referring to experiences of Brazil and Turkey that reached high GDP growth rates at the expense of suffering inflation rates of up to 70%.
Many, however, find this argument baseless.
Citing official statistics, CBI analyst Pouya Jabal-Ameli says despite the sharp fall in inflation, the government has managed to push the growth rate up from below zero to positive territory.
He describes such critics of the government as “inflation profiteers”.
A high inflation rate compels the central bank to set high interest rates. As interest rates soar, more money is lent since high interest rates encourage people to deposit their money in banks, which in turn raises the banks’ reserves.
According to the expert, the big borrowers herein would be sham manufacturing lobbyists, who do not intend to use their borrowed money in industrial activities.
“The growing demand for loans creates a fiscal gap that leaves the CBI with no choice but to print money. This increases the liquidity and ultimately pushes the inflation back up. And this is how this vicious circle is abused by the inflation profiteers,” Jabal-Ameli explains.
