The Realization of the Promise of Single-Digit Inflation Amidst Recession

Three years ago, during the intense electoral competition of June 2013, Hassan Rouhani promised to reduce inflation to single digits as part of his economic programs as a candidate in that election. To fulfill this promise, a three-year wait was necessary until June 2016, when the Statistical Center of Iran and the Central Bank separately announced that the inflation rate had reached single digits. However, beyond the three-year wait for Hassan Rouhani's promise as the head of the government, the achievement of single-digit inflation was a 25-year expectation in the Iranian economy. According to the Central Bank's report, the average inflation rate, which reflects changes over a 24-month period of the price index of goods and services, reached below 10 percent (9.7 percent) in June this year. Prior to the Central Bank, the Statistical Center of Iran also reported the average inflation rate for June 2016 as 9.5 percent. The announcement of these figures means that the consumer price index for goods and services increased by less than 10 percent in the 12 months ending in June 2016 compared to the 12 months ending in June of the previous year. The achievement of single-digit average inflation occurred after the point-to-point inflation rate experienced less than 10 percent increases in consecutive months. The sweet promise of achieving single-digit average inflation has come with the bitter taste of recession and unemployment, as the eleventh government has managed to free itself and the Iranian economy from inflation rates above 40 percent but has not been able to restore growth to the Iranian economy to improve the unemployment rate. Although it should be noted that while growth has not returned to the Iranian economy, the deepening of the recession has stopped, and after two years of experiencing negative growth rates of 6.8 and 1.9 percent in the years 2012 and 2013, the Iranian economy managed to return to positive growth channels, with economic growth rates of 3 and 1 percent in the years 2014 and 2015, respectively. An examination of the inflation rate over the 38 years following the 1979 revolution shows that in all these years, the average inflation rate was only single-digit in the years 1985 and 1990, while in the remaining years, the average inflation rate fluctuated in the double digits, above 10 percent. This fluctuation during the period sometimes reached figures above 30 percent, with the highest recorded average inflation rate of 49.4 percent occurring in 1995, attributed to the effects of the structural adjustment program. Another peak in the average inflation rate occurred when it reached 34.7 percent in 2013, where monetary and fiscal indiscipline, intensified sanctions, and reduced oil revenues caused the government to face a significant budget deficit, with financing the deficit from inflationary sources such as borrowing from the Central Bank cited as the main reasons for the inflation peak in 2013. In explaining the reasons and rationale for the reduction of the inflation rate to below 10 percent in June this year, two different analyses can be identified. One segment includes government supporters who attribute this unprecedented decrease to the economic planning of government officials, including financial and monetary discipline, and the government's abstention from borrowing from the Central Bank as a means to finance the budget deficit. The second group believes that the decline in the inflation rate is due to the widespread recession in the Iranian economy, which they believe has led to a decrease in effective demand, ultimately resulting in a drop in the inflation rate. However, it seems that both analyses reference factors that have contributed to the decline in inflation growth, making the realization of single-digit inflation possible. An examination of the inflation of groups and the price index components constituting the inflation rate in June this year indicates that the point-to-point inflation rate for the main group of 'food and beverages' in June this year recorded a 2.7 percent increase, the lowest growth rate among the main groups. The highest point-to-point inflation rate among the 12 main groups examined by the Central Bank in June 2016 was related to the main group of 'education,' which experienced an inflation rate of 21.7 percent this month. A noteworthy point in the Central Bank's report on inflation for June 2016 is the monthly inflation rate for this month, indicating a growth in the inflation rate from May to June 2016, reported at 1.2 percent, which has not been seen since December of the previous year. The sustainability of the single-digit inflation rate and the continuation of this trend is the main concern of experts, especially given the recorded monthly inflation rate above one percent in June 2016. A review of the details of monthly changes in a selected basket by Radio Farda in June also shows that the average changes in this basket from May to June 2016 were even slightly negative, with the average price of this basket decreasing by half a percent during this one-month period. Tomatoes recorded the largest price decrease, while chicken meat topped the increase. Further details of the changes can be seen in Table 1. The change in the basis for comparing prices in this basket from May 2016 to June 2015, which describes the one-year point-to-point inflation rate of the selected basket of Radio Farda, shows that the average price changes of the goods listed in this basket increased slightly above the average inflation rate, growing by more than 10 percent. The highest price increase during this one-year period was for domestic grade one rice, while the largest price drop was recorded for eggs. Changes in the prices of 10 selected goods by Radio Farda in the spring of 2016 compared to the same season last year indicate relative price stability in the two mentioned seasons. The average price changes of this commodity basket in spring 2016 compared to spring last year experienced a slight increase of just over one percent (1.33 percent). Potatoes recorded the largest price decrease in these two time periods, while the highest price increase was for domestic grade one rice. The recent reduction in bank interest rates, including deposit and loan rates, and the government's insistence and efforts to achieve growth may be among the influential factors in keeping the inflation rate in single digits in the coming months, although economic decision-makers have always emphasized that the government is unwilling to lose the achievement of reducing the inflation rate and achieving single-digit inflation.