Snowballing Inflation; Producer Price Index Reaches 18 Percent

News regarding inspections by the Organization for the Protection of Consumers and Producers or other inspection and supervisory organizations that strive to control the prices of various goods and services has dominated media reports in recent weeks. It seems that some 'opportunists', 'greedy' or 'price gougers' have decided to maximize their profits through overpricing amid the chaos and severe fluctuations in the currency market and uncertainty about the future of Iran's economy. It is undeniable that producers or traders may increase the prices of their goods and services in an effort to maximize personal profit, and there are certainly producers or traders who sell their previously produced or imported goods at inflated prices. The well-known argument of this group, regardless of its ethical or philosophical considerations, is based on economic logic. In inflationary conditions, replacing goods at previous prices is impossible, and a higher price than the previous selling price must be paid for replacement, leading producers and traders to offer their previously produced or imported goods at new prices. However, is this pattern of overpricing the norm for most producers? The main question is whether the increase in the prices of consumer goods and services in recent weeks and months is due to an increase in the general price level of various goods and services stemming from a structural inflation or the result of overpricing by a number of 'profiteers'? To answer this question, examining the Producer Price Index can yield reliable results. The Producer Price Index reflects inflation at the production level and depicts the prices of various goods at the wholesale level and at the producer's factory. Therefore, changes in this price index manifest themselves with a few months' delay at the retail and consumer levels. Accordingly, the Producer Price Index is considered a leading indicator for the Consumer Price Index or inflation index, and changes in the Producer Price Index, or so-called production inflation, can help predict the movement of the inflation index in the coming months. According to the Central Bank's report on the Producer Price Index in September, the average production inflation rate in this month reached 18.2 percent, which is three percentage points higher than the average inflation rate in August. The Central Bank of Iran announced that the year-on-year point-to-point production inflation in September this year was 44.4 percent, the highest point-to-point production inflation rate in the past five years. As can be seen in the accompanying chart, although point-to-point production inflation has shown an upward trend since December of last year, since June of this year, point-to-point production inflation has been continuously changing its fluctuating channels with a sharp jump, ultimately entering the 44 percent channel in September. The monthly inflation trend also indicates that since June of this year, the figures related to the increase in monthly production costs have risen to unprecedented levels. Among the main groups constituting the Producer Price Index, the highest point-to-point inflation rate was related to the main group 'Construction', which grew by 61.1 percent in September this year compared to September last year. This figure reflects changes in the Producer Price Index of the industrial sector, which is, incidentally, the most important group among the main groups under review. The average inflation of this group, meaning the inflation for the 12 months ending in September this year compared to the same period last year, showed a growth of 23.3 percent. The most important factor in the increase in production costs can be attributed to price jumps in the currency market in recent months. According to statistics from the Iran Trade Development Organization, in the first five months of this year, over 60 percent of Iran's total imports consisted of intermediate goods, and about 15 percent of total imports were allocated to capital goods. These goods, which are typically used in the production process, have been supplied in recent months at higher exchange rates and in some cases even at several times the previous price, increasing the production costs for Iranian producers. Therefore, it is not far-fetched to say that the cost price of Iranian-made goods has increased and that production inflation is facing unprecedented growth. Typically, with a time lag of three to eight months, producer inflation transfers from the wholesale level to retail, and thus it can be expected that the inflationary trend that began at the retail level in August and September will continue in the coming months. Given that Iranian producers will not be able to sell their produced goods in the coming months at the cost prices prior to the current price jumps, the inevitable increase in prices is not overpricing, and combating it through tried-and-true methods of arrests and penalties will not be effective. Price suppression, in a best-case scenario, will lead to a reduction in producers' profit margins, and in a worst-case scenario, will push them into loss-making territory, ultimately preventing producers from continuing their activities. This cycle will exacerbate the problem of scarcity, reduce supply, and increase inflation.