Iran's Inflation Rate Drops to Single Digits: From Statistics to Reality

The announcement by the Central Bank of the Islamic Republic on Monday, April 8, regarding the inflation rate dropping to single digits in the year 1395 (2016) is a victory cry. The most important institution for calculating price indices states that the inflation rate for the past solar year is 9 percent, adding that 'based on this, Iran has joined the ranks of countries with single-digit inflation after 26 years.' Who is right? The significance of announcing a single-digit inflation rate for Iran after nearly a quarter of a century is not solely economic. Hassan Rouhani, who is likely to run for the upcoming presidential election very soon, can tell voters and his opponents that he has fulfilled his promise to control prices, reducing the inflation rate from 35 percent in 1392 (2013) to 16 percent in 1393 (2014), 12 percent in 1394 (2015), and finally to 9 percent in 1395 (2016). Interestingly, at the same time as the Central Bank announced the single-digit inflation rate for 1395, the economic news agency 'Bloomberg' reported a resurgence of this index in Iran. Who is right? To answer this question, we must first refer to the characteristics related to measuring inflation in Iran. If we look at the Central Bank's announcements, we see that this index is usually reported in three ways: 1) Average inflation rate, which measures the average inflation rate over the past twelve months compared to the twelve months prior. For the year 1395, the average inflation of this year compared to 1394 is evaluated, resulting in a rate of 9 percent. In Iran, this average inflation rate is declared as the official inflation rate. In the announcement of April 8, the Central Bank stated: 'The inflation rate in the twelve months ending in Esfand 1395 compared to the twelve months ending in Esfand 1394 is 9 percent.' 2) Point-to-point inflation rate, which measures price increases in the month under review compared to the same month of the previous year. In our case, the price basket in Esfand 1395 is compared with Esfand 1394. The Central Bank's announcement reads: 'The consumer price index in urban areas of Iran increased by 11.9 percent in Esfand 1395 compared to the same month of the previous year.' According to the Central Bank's statistics, the average price of food and beverages in Esfand 1395 increased by 5 percent compared to Bahman of the same year and nearly 18 percent compared to Esfand of the previous year. In the same statistics, healthcare became 17 percent more expensive over the year (from Esfand 94 to Esfand 95). Such price jumps are unimaginable for residents of Western Europe, the United States, and a large part of Asia. 3) In the third method, the inflation rate is reported month-to-month. The Central Bank states that this index increased by 2 percent in Esfand compared to Bahman. We reiterate that in Iran, the official inflation rate is the average inflation rate, and the 9 percent reported is the inflation rate in the twelve months ending in Esfand 1395 compared to the twelve months ending in Esfand 1394. This index, when measured this way, reflects price changes over the past 24 months. With this calculation, the inflation rate in Iran has decreased from 11.9 percent in 1394 to 9 percent in 1395. Conversely, the point-to-point inflation rate in Iran, which sets the basis for one year, has noticeably increased, as the consumer price index in Iran, as mentioned, increased by about 12 percent in Esfand 1395 compared to Esfand of the previous year. Regarding the month-to-month inflation rate, we see that we are witnessing an acceleration in the inflation rate, not a decrease. In Esfand 1394, the consumer price index in urban areas of Iran only increased by 0.7 percent compared to Bahman of the same year. In contrast, in Esfand 1395, the same index increased by 2 percent compared to Bahman of the same year, which is a significant difference. In short, 'Bloomberg' reported a resurgence of this index in Iran based on the point-to-point inflation rate (twelve months), while the Central Bank of the Islamic Republic emphasized its single-digit status based on the average inflation rate (twenty-four months). In this context, what seems certain is the reversal of the declining trend in the inflation rate in Iran, as since Khordad 1395 (June 2016), we have seen increasing signs of inflationary tension in Iran. In fact, the point-to-point inflation rate gently decreased to 6.8 percent in Khordad last year, but since then it has risen again, reaching nearly 12 percent in Esfand, as mentioned. The same reversal of trend, from decrease to increase, is clearly seen in the month-to-month inflation as well. Given all this evidence, the official (or average) inflation rate in Iran is likely to return to double digits in the very near future. In other words, the process of achieving a single-digit official inflation rate in Iran is a 'temporary government' situation, and a large part of Iranian and international expert circles emphasize its unsustainability. There is no doubt that Hassan Rouhani's government has acted more disciplined in controlling prices than its predecessor. However, no fundamental reform has been made that could lead to a sustainable control of inflationary tensions in Iran. Government spending continues to rise, the budget deficit is staggering, and the government finances it directly and indirectly from the Central Bank. A large part of Iran's economy (which plays a role in money creation and fueling inflation) is not under government control, and the liquidity volume has increased by about 30 percent annually, reaching 1200 trillion tomans, all in a stagnant economy where its growth rate, excluding oil, fluctuates around zero. Essentially, for Iranian consumers, 'point-to-point' and month-to-month inflation is more tangible than what the Central Bank publishes under the title 'average inflation.' People compare prices during the Nowruz (Persian New Year) of 1395 with the previous year's Nowruz, especially for the goods and services they need most. In this regard, even if we refer to the official statistics published by the Central Bank of the Islamic Republic, we see that for ordinary people, the tangible and real inflation rate is at least twice the 9 percent that this institution has generally announced under the title 'average inflation,' and thus, the announcement of this index becoming single-digit after twenty-six years is misleading.