Iran Breaks 20-Year Inflation Record

The Central Bank of Iran's report on the inflation rate for August has revealed astonishing figures, particularly regarding monthly inflation and point-to-point inflation of main groups. The average inflation rate for August is reported at 11.5%, which represents a 1.3 percentage point increase compared to the average inflation rate of July, maintaining an upward trend. However, the average inflation rate does not accurately reflect the inflation surge of recent months. To understand what has occurred in the consumer market in recent months, one must consider the monthly inflation rate and the point-to-point inflation rate. According to the Central Bank, the monthly inflation rate for August was 5.5%, an unprecedented figure not seen in the past 20 years. The last time a monthly inflation rate higher than 5.5% was recorded was in April 1999, when it reached 5.9%. This monthly inflation rate indicates that the general price level in retail has increased by 5.5% over the past month, meaning that if the monthly inflation rate remains around this level, an unprecedented inflation rate should be expected by the end of the year. The monthly inflation rate has also fluctuated at a high level in recent months, indicating a stabilization of the inflation trend during these months. Overall, from April to August of this year, the consumer price index in urban areas of Iran has experienced a 15.7% increase. The Central Bank's report also shows an unbelievable point-to-point inflation rate for August: 24.2%. Analyzing the components of inflation among the main price index groups reveals astonishing results. The inflation rate for the 'Tobacco' group in August leads the inflation increase, with point-to-point inflation for this group entering the three-digit range, growing by 114.4%. The monthly inflation rate for this commodity group exceeded 24% this month. Following the tobacco group, the price index for the main group 'Recreation and Cultural Activities' was reported at 51.6%. The fluctuations in the currency market and the sharp increase in currency prices can best explain the high inflation rates for these two groups. Comparing the inflation rates of the 12 main groups at two time points, August of this year and August of last year, clearly illustrates the change in the range of inflation fluctuations during these two periods. Among the 12 main groups examined by the Central Bank to determine the inflation rate, the 'Food and Beverages' group holds special significance, as its high importance in determining the inflation rate and the impact of price changes in this group on the expenditure basket of low-income deciles doubles the sensitivity to price changes in this group. In August of this year, the point-to-point inflation rate for the 'Food and Beverages' group increased by 35.9%, with a monthly inflation rate of 7.6%. Additionally, a comparison of the inflation rate changes for this group in August of the years 2016, 2017, and 2018 indicates a significant inflation surge in this group's price index during these three periods. The Central Bank, in its monthly reports, also announces the inflation rates for two 'exclusive' groups, which include 'Goods' inflation and 'Services' inflation. Until a few months ago, the goods inflation rate had typically entered a decreasing channel, while the services inflation rate was not decreasing; however, it now appears that the price surge of goods has noticeably separated goods inflation from services inflation. The point-to-point inflation rate for goods in August was reported at 34.5%, while the services inflation rate for this month was 14.4%. An examination of the price changes for ten selected goods in the Radio Farda basket also shows that the general trend of price increases has affected these commonly consumed goods in Iranian households' food baskets. Based on this monthly examination, in August of this year compared to the previous month and August of last year, the highest price increases were related to chicken meat, beef, and eggs. The simple average price change for this basket in August compared to July of this year was a 7.5% increase, and the simple average price change for this ten-item basket in August of this year compared to the same month last year was about a ten percent increase. The surge in the prices of various currencies and the political concerns stemming from the U.S. withdrawal from the JCPOA and the re-imposition of sanctions on Iran's economy have led to a decrease in the raw materials needed for production, a reduction in the supply of goods to the market, and an increase in precautionary demand and speculation across various markets, resulting in an unprecedented inflation rate increase. The second phase of the new round of U.S. sanctions against Iran, which includes sanctions in the oil and gas sectors and banking relations, will be implemented in mid-November. Although the psychological effects of these sanctions on the Iranian economy have largely been anticipated, this does not mean that the onset of the November sanctions will not have an additional effect on the emergence of disorder or fluctuations in the markets. At the very least, speculators and opportunists will take advantage of these psychological effects. Meanwhile, the structural reasons for inflation in Iran's economy, including the government's budget deficit and the ways to compensate for this deficit using the Central Bank's resources or the banking system, along with the high and destructive liquidity that has even surpassed the value of Iran's gross domestic product and crossed the threshold of 1,600 trillion tomans, have also contributed to this inflation.