Economy, Business And Markets

What to Make of Zero Percent PPI Growth?

Fluctuations in foreign currency rates may have played a role in the behavior of producer price index.Fluctuations in foreign currency rates may have played a role in the behavior of producer price index.

The Producer Price Index (using Iranian year to March 2012) stood at 236.2 in the Iranian month of Ordibehesht (April 21-May 21) compared with the previous month’s 236.3, suggesting that average price of items produced at the wholesale or producer level remained almost unchanged.

The monthly growth of PPI in the second half of the year ending March 2015 was almost negative but it entered positive territory in the following 14 months. It even recorded a 2% growth—the highest in three years—in the Iranian month of Azar (November 21-December 20, 2016), mainly thanks to fluctuations in the foreign currency market back then.

PPI growth averaged at 0.7% in the final quarter of last year (December 21, 2016-March 20, 2017). But the index saw a 0.3% decline in the first month of the current Iranian year, Farvardin (March 21-April 20, 2017), indicating a 0.4% growth. This downtrend of PPI growth continued into Ordibehesht to register an almost 0% rise, according to the latest report by the Central Bank of Iran.

Several scenarios can be imagined to explain the sticky prices of products at the beginning of the production chain. One might be the producers’ unwillingness to raise prices due to lack of demand. This reluctance is to blame on the economic recession mirrored in monthly price changes, the Persian daily Donya-e-Eqtesad reported.

The second reason could be the recent election and its likely effect on supply and demand. Presidential elections were held in Iran on May 19, the 12th such poll in Iran.

Fluctuations in foreign currency rates may also have impacted producer price index. The average exchange rate of the dollar was reportedly 37,600 rials in Ordibehesht compared to 37,760 rials in the month before, indicating a 0.5% drop.

A positive correlation exists between fluctuations in forex rate and prices of imported items. A decline in exchange rates is synonymous with a decline in the prices of imports and the domestic producers’ leeway in raising prices.    

The average PPI in the 12 months to May 21 increased 5.9% compared with last year’s corresponding period. The Central Bank of Iran put the preceding month’s PPI inflation at 5.4%. A year-on-year increase of 8.5% was registered in the index compared with a 3.1% increase posted for the similar month of last year.  PPI’s year-on-year average increase showed an uptrend in winter—the final quarter of last year (December 21, 2016-March 20, 2017) to hit a two-year high of 9.4% in Esfand (February 19-March 20, 2017).

CBI put year-on-year increase of Farvardin’s PPI at 9.2%.

Monthly inflation rate of two out of eight main groups, namely “Agriculture, Forestry and Fishing” and “Industry” posted negative rates of 0.4% and 0.5%, respectively.

This comes as the producer price index of “Industry” group had increased by 0.8% in the month leading to March 21 and 2.8% in the quarter ending March 20. The 0.4% decrease in “Industry” group is an indicator of recession in one of the main economic sectors.

“Transportation” and “Education” groups had the highest and lowest monthly inflation growth among all groups with 1.2% and 0.2%, respectively.

“Health and Social Work” group also recorded a 17.2% YOY PPI increase in Ordibehesht, the highest among eight groups.

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.

The central bank’s latest data on CPI show the goods and services CPI for urban areas in the 12 months to May 21 increased 9.8% compared with last year’s corresponding period.

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