The Puzzle of Inflation Reduction Amidst Inflated Liquidity

The Statistical Center of Iran announced the average inflation rate for the end of July this year as 9 percent, while the Central Bank reported it slightly higher at 9.2 percent, continuing the trend of declining average inflation rates. The average inflation rate for June was reported as 9.7 percent by the Central Bank and 9.5 percent by the Statistical Center. A notable point in the reports from these two centers regarding the inflation rate for July is the point-to-point inflation rate, which has increased compared to the point-to-point inflation rate for June in both reports. According to the Central Bank of Iran, the point-to-point inflation rate in July reached 8.1 percent, the highest point-to-point inflation rate in the first four months of this year. If the point-to-point inflation rate maintains this level in the coming months, a return to double-digit average inflation rates would not be surprising. The Statistical Center of Iran also emphasized that the point-to-point inflation rate in July reached 6.5 percent, which was 0.4 percentage points higher than the point-to-point inflation rate for June. An analysis of the price index of major groups in the Central Bank's report on July inflation shows that the point-to-point inflation rate for the main group 'Education' fluctuated at a level above 20 percent with a growth of 21.6 percent. Another main group that has experienced a high double-digit point-to-point inflation rate in recent months is the 'Health and Medical' group, which recorded a point-to-point inflation rate of 15.9 percent in July. Other main groups with double-digit point-to-point inflation rates included 'Tobacco', 'Miscellaneous Goods and Services', and 'Restaurants and Hotels'. The growth rate of the price index for the main group 'Food and Beverages' stabilized at 5.3 percent in July. A comparison of the inflation rates for the specific groups 'Goods' and 'Services' in July shows that the inflation rate for services remained in double digits (12.2 percent), while the inflation rate for goods was single-digit at 5.1 percent, although it should be noted that the inflation rate for both specific groups increased relatively compared to the previous report for June. Detailed analysis of the Statistical Center of Iran's report on July inflation also indicates that the index for the major group 'Food, Beverages, and Tobacco' grew by 6.1 percent compared to the same month last year, maintaining a downward trend. The growth rate of the price index for the major group 'Food, Beverages, and Tobacco' in June compared to the same month last year was recorded at 7.5 percent. In this report from the Statistical Center of Iran, the index for the major group 'Non-Food Goods and Services' experienced a 6.7 percent increase in July compared to July last year. Monthly changes in the 'Selected Goods Basket of Radio Farda', which focuses on price changes of 10 commonly consumed items in household expenditure, indicate that the average price of this basket grew by 1.6 percent from June to July. According to Table 1, the highest price increase during this period was approximately 12 percent for 'Domestic Grade One Rice', while the largest price decrease was recorded for 'Eggs'. Changing the comparison base for price changes of these items from June to July last year yielded different results, showing that the average price of this basket increased by 13.1 percent over the year, exceeding the average inflation rate. The most significant factor contributing to this price increase was a 37.5 percent rise in the price of 'Domestic Grade One Rice' during this period. The price of 'Sugar' also rose by about 30 percent from July last year to this July. The largest price decrease from July last year to this July was a 5.5 percent drop in the price of a '30-count Egg Carton'. Although the inflation rate in July this year continued to follow a downward trend according to the statistics from both economic data providers, the continuation of this trend and the maintenance of the single-digit inflation achievement in the coming months face challenges. The most significant challenge is the staggering growth of the liquidity rate, which reached 1,038 trillion tomans with a recorded growth rate of 30 percent in May this year. According to the Central Bank's report, 21 trillion tomans were added to Iran's total liquidity in the first two months of this year. Although the relationship and interconnection between the liquidity growth rate and the inflation rate have recently diverged in Iran's economy, based on major studies conducted in this area, the liquidity growth rate and inflation rate still have a high correlation in the long term, and the influx of liquidity can complicate the control of inflation and increase this important macroeconomic indicator. To justify the reduction in inflation despite the increase in liquidity, it is stated that liquidity growth affects the general price level of goods and services with a delay, and some experts also consider analyzing the components of liquidity to be significant in assessing its impact on inflation. According to these experts, liquidity growth resulting from the velocity of money or an increase in non-demand deposits has a far lesser effect on inflation changes than liquidity growth resulting from an increase in the monetary base and the printing of banknotes and coins in circulation. However, many experts view the reduction in inflation as the flip side of deepening recession and attribute the single-digit inflation to a decrease in overall demand and the erosion of people's purchasing power. Kamran Dadkhah, an economist and professor of economics at Northeastern University in Boston, expresses doubt about the accuracy of the reported inflation rates, deeming the simultaneous increase in liquidity growth and decrease in inflation economically illogical. On the other hand, the government's program and efforts to stimulate the economy, which involve equipping banking resources and empowering banks to provide loans to various economic sectors, could potentially increase the inflation rate.