Remaining in Single Digits; This is the Issue

Since June 2016, the inflation rate remaining in single digits has reduced sensitivities regarding changes in the inflation rate compared to when it was above 30 or even 40 percent. However, the sustainability of the declining inflation trend and maintaining the achievement of single-digit inflation remains sensitive. Therefore, the announcement of inflation figures for August 2016 and the examination of minor changes in the inflation rate during this month were of heightened importance for experts. In August this year, the average inflation rate continued its downward trend, with the Central Bank reporting a 12-month inflation rate ending in August 2016 at 8.9 percent, a decrease of 0.3 percentage points from July. The Central Bank of Iran had reported an average inflation rate of 9.2 percent for July. The Iranian Statistics Center's report on the inflation rate for August also indicates that the declining trend in average inflation continued, with the 12-month inflation rate ending in August 2016 reaching 8.7 percent, a decrease of half a percentage point from the average inflation rate in July. However, careful examination of the monthly inflation changes for August and the point-to-point inflation rate in both reports from the Iranian Statistics Center and the Central Bank did not reflect the average inflation rate. The Central Bank reported a monthly inflation rate of 1.1 percent for August, whereas the monthly inflation rate in July was less than one percent, at 0.8 percent. The point-to-point inflation rate for August, according to the Central Bank, was 9.4 percent, which represents an increase of 1.4 percentage points compared to the point-to-point inflation rate for July 2016, which was reported at 8.1 percent. The point-to-point inflation rate compares the inflation rate for the reported month to the same month last year and effectively narrates a 12-month memory of inflation. The point-to-point inflation rate for August 2016 in the Iranian Statistics Center's report also showed an increasing trend, marking the second consecutive month of upward change. According to the Iranian Statistics Center's report, the point-to-point inflation rate in August reached 7.4 percent, which is an increase of 0.9 percentage points compared to the point-to-point inflation rate for July, which was 6.5 percent. However, in the Iranian Statistics Center's report on the inflation rate for August 2016, the monthly inflation rate compared to the inflation rate in July, which was 1.6 percent, showed a slight decrease of 0.2 percentage points, reaching 1.4 percent. In both official statistical reports, the monthly and point-to-point inflation rates have moved towards losing the achievement of single-digit inflation. To continue the declining trend of average inflation and keep it below 10 percent, it is necessary for the monthly inflation to fluctuate below one percent, which has faced challenges in recent months. Additionally, the change in the direction of the point-to-point inflation rate towards an upward trend could pose challenges in the coming months for maintaining average inflation below 10 percent. The most significant reason for the change in the phase of monthly and point-to-point inflation can be found in the growth of liquidity rates and fluctuations in this index, which is around 30 percent. On the other hand, the government's efforts to pull the Iranian economy out of recession, which has been accompanied by banking openings, could also be a significant factor in increasing monthly and point-to-point inflation rates. It seems that if the current expansionary monetary policy continues, single-digit inflation may be replaced by inflation above 10 percent, and losing this achievement on the eve of election year is not particularly appealing to politicians. Meanwhile, the implementation of a single exchange rate policy, which is on the agenda of economic policymakers and supported by economic activists, could inherently have an increasing effect on inflation. An examination of inflation in various commodity and service groups in the reports from the Central Bank and the Iranian Statistics Center also indicates persistent inflationary pressure in groups such as health and education, which has been observed in recent months. In the Central Bank's report on August inflation, the point-to-point inflation rate for the main group 'Education' was the highest, with a 21.5 percent increase, followed by the main group 'Health and Medical Care' with a 17.3 percent increase in second place. The main group 'Transportation' was the only group among the 12 main groups in the Central Bank's report that faced a 0.7 percent decrease in August. The price index for the main group 'Food and Beverages' experienced a 9.5 percent inflation rate in August, with a monthly inflation rate of 1.1 percent recorded for this group. In the Iranian Statistics Center's report, the highest average inflation rate among the various groups examined was related to the Education group, which recorded an average inflation rate of 15.2 percent in August. Following this group, the highest average inflation rate was attributed to the Health and Medical Care group, which grew by 11.6 percent in August. The average inflation rate for the Food and Beverages group in August was 6.8 percent, with a point-to-point inflation rate for this group reported at 8.8 percent by the Iranian Statistics Center. An examination of price changes for a selected basket of goods by Radio Farda in August this year indicated a relative increase in prices for these items. The price changes for this selected basket, which includes commonly used household items in Iran, had been relatively stable in recent months but have recently shown noticeable increases. The average price change for this basket in August 2016 compared to July of this year showed a 2.5 percent increase. Among these, the highest price increase of 23.75 percent was attributed to sugar. Eggs also saw a price increase of about 22 percent during this one-month period. In contrast, potatoes and tomatoes experienced price decreases of seven and six percent, respectively. In Table 1, the price changes for this selected basket of goods from July to August of this year can be observed. Changing the comparison base from July 2015 to August 2014 makes the price changes more pronounced. The point-to-point inflation for this basket in August 2016 exceeded 16.1 percent. The highest price increase during this one-year period was attributed to sugar, which saw an increase of nearly 60 percent. The price of domestic grade one rice also increased by more than 51 percent from August 2014 to August 2015. Tomatoes and boneless beef were among the few items from the ten items examined in this selected basket that ended the one-year period from August 2014 to August 2015 with price decreases. The price of tomatoes decreased by about 25 percent during this period. Table 2 shows the details of price changes for items listed in the selected basket from August 2016 compared to the same month last year. The approximately 30 percent growth in liquidity is the most significant factor lurking behind inflation, while the unification of the exchange rate, expansionary policy, and facilitation of financial resource circulation, equipping banks, and lowering bank interest rates are other factors that could potentially increase inflation rates in the coming months. However, producer inflation, which is referred to as a leading indicator of inflation and whose changes take several months to reach consumer levels, has continued to show a downward trend in the latest report from the Central Bank. The average producer inflation rate in August this year was 3.3 percent, with the producer price index increasing by 0.7 percent compared to July, and the point-to-point producer inflation rate for this month remained below three percent at 2.6 percent. The registration of these figures for producer inflation could become a reliable point for the government to remain hopeful about keeping the inflation rate in single digits and to continue its policies to alleviate recession.