The implications of Mehr inflation data

Iranian economy:

Based on these data, the rural point-to-point inflation rate is still three-digit and equal to 107%, and the urban point-to-point inflation rate is 85.5%. Meanwhile, the point-to-point inflation rate of food, beverages and tobacco is 113.4% and non-food goods and services is 74.6%. Also, the point-to-point inflation rate of the total index without considering the rent was 111.7% and the point-to-point inflation rate of the rent was 33.4%. Therefore, relatively low rent inflation has played the main role in preventing inflation from reaching three digits. But due to the sharp growth of housing prices in the past year, there is a concern that the increase in rent inflation in the coming months will be a factor to keep inflation at a high level. In terms of the geographical distribution of inflation, 8 provinces of the country have had three-digit inflation, and almost all of them are deprived provinces. Another point that needs to be mentioned is that based on point-by-point inflation, the inflation of the lower deciles is still higher than the inflation of the upper deciles; Although recently, the monthly inflation has shifted towards the upper deciles. Therefore, the total evidence still indicates that the main pressure of inflation is on the lower classes of the society, which has both more inappropriate social and welfare effects, and combined with the sharp growth in asset prices and the decrease in growth and employment in the past year, it has a very different welfare consequence than what the Gini coefficient reflects.

But independent of the statistical details of October inflation, what can be concluded based on the theoretical knowledge related to inflation from the analysis of the inflation of the last few months and comparing it with the inflation jumps after 1397? In order to provide a theoretical analysis of the behavior of the inflation rate in the last few months, let us first look at the behavior of the inflation rate point by point from the beginning of 2017 to Mehr 1405. It should be noted that the point-to-point inflation rate reflects the changes in the inflation rate faster than the annual inflation rate, although in a long period these two concepts give similar results. Chart 1 shows the point by point inflation rate for the mentioned period. As can be clearly seen from the graph, the inflation rate has experienced significant jumps in 2017, 2018, 2019 and 2020 due to 2 different reasons, and since the winter of 2013; This means that the point by point inflation rate has started to increase sharply and has found a significant distance from the inflation rate at the beginning of its jump.

In all the previous inflation jumps and even in the inflation jumps at the beginning of the 1390s and the beginning of the 1970s, when the inflation rate has risen from point to point, at one point in time, its upward trend has stopped and it has started a relatively fast downward trend. In 2017, although the rise in inflation was one of the most intense inflationary jumps compared to the low inflation in 2016, but as soon as it reached its peak, it took a noticeable downward path. In 2019, which was one of the sharp inflation jumps, and the majority of predictions were that Iran’s economy has become Venezuelan and hyperinflation is ahead, but the point-by-point inflation rate started a downward trend after reaching the peak of about 50%. In 1401, with the removal of the preferential currency and the revelation of the hidden inflation of the preferential currency allocation, point-to-point inflation decreased after three months of rising, and the events of the second half of 1401, which made the point-to-point inflation rise again, the point-to-point inflation rate began a downward trend again after four months. Of course, it should be noted that the widespread imbalances accumulated in Iran’s economy after 1397 caused the inflation rate to be at a higher level, and therefore, the decline in inflation did not mean a return to the previous averages.

Now let’s talk about the inflation jump that started in the winter of 1403. This jump, which was the longest and most severe inflationary jump among the inflationary jumps in recent decades in Iran, lasted for about 19 months; While the previous mutations have lasted for about a year. Also, the recent spike has caused point-to-point inflation to be at a much higher level than the previous spikes, and Iran’s economy, after fluctuating around 40-50% annual average inflation for several years, will enter the 70% annual inflation channel, and naturally, in the coming months, the annual average inflation will enter the 80% channel, and it will leave this concern for the Iranian economy, which will have to deal with the changed level of inflation. But what precisely in the recent inflation jump and the behavior of inflation in recent months may attract our attention? The first thing that can be recognized from the data is that for about 5 months, the point-to-point inflation rate around 89% has shown a brief fluctuation in the direction of increase or decrease.

This behavior has not been observed in previous inflationary jumps. It should be noted that because the recent inflation jump has put the inflation rate at a much higher level, its small fluctuation around 89% is important; Because in the previous absolute inflations, the fluctuation of inflation around its peak was more, which in relative terms indicated more fluctuation and faster rise and fall. This point-to-point inflation situation can have two different messages. The first message is that Iran’s economy, unlike previous periods, is simply not able to return to low inflation, and as if it should be accepted that inflation fluctuates in much higher channels than in the past. The second message is that Iran’s economy is entering increasing inflation and preparing for hyperinflation, and for some reasons, at least temporarily, that issue has been ruled out. In the following, assuming that the policy-making system has been trying to avoid hyperinflation (although this does not negate the continuation of inflation at the current high levels), we will present possible explanations for the reason for the non-continuation of the increasing trend of inflation point by point.

One explanation is that because according to some economists, the cause of recent inflation was a cost shock, and because cost shocks cause a temporary and transitory jump in inflation, now the effect of that cost shock has been partially exhausted, and for this reason, inflation has not followed its upward trend. This explanation seems slightly inconsistent with the observations; Because inflation is still at high levels of about 89% point by point and monthly inflation is above 4% and even in the last 2 months monthly inflation has increased slightly. This is despite the fact that inflation caused by cost shocks cannot occur at 80% and must decrease at a significant speed and at least not remain at the current high levels. Let’s not forget that with the current monthly inflation and assuming the continuation of the current monthly inflation figures, inflation will be over 60% in the coming year. Therefore, this explanation does not seem to be very convincing.

The second explanation is that since the middle of 1403, the growth of liquidity has been increasing, and in the second half of 1404 and the beginning of 1405, it has become very intense, and along with the increase in the speed of circulation of cash, it has caused a sharp jump in inflation, but since the middle of summer, the growth rate of liquidity has decreased, and as a result, the upward trend of the inflation rate has also stopped. But this explanation is not convincing either; Because in the last 2 months, the price of assets has followed a significant jump, which is usually a jump in the price of assets is the prelude to the inflationary jump in the price of goods and services, and at the same time, the effect of liquidity growth on macroeconomic variables, including inflation, appears with some delay. Meanwhile, the point-to-point inflation rate has stopped around 89% since July and has fluctuated slightly. At the same time, we should not forget that the growth of liquidity itself is the result of another factor that we discuss in the third explanation.

The third explanation is that the government gradually faced with the increase of its expenses affected by the war conditions and at the same time suffered a decrease in oil income, tried to improve its income sources by adjusting the price of what it has been trying to prevent for a long time. We do not have any data on this issue; However, the increase in the exchange rate, the increase in the price of water, electricity, gas, and gasoline, and things like that, have caused both the demand for goods and services to be limited, which is itself a factor in curbing inflationary pressure, and the government’s revenue sources have improved, and the government’s budget deficit is lower than what it was in the absence of these measures. If we look at the issue with the theories of economists such as Sargent and the founders of the financial theory of inflation, this explanation seems more convincing. The reason is that these theories consider the main source of inflation to be the budget deficit and the increase in the government’s obligations (of course, in Iran, the government in its broad definition) that future taxes will not provide the possibility of repayment.

The government’s actions in preventing a sharp decrease in its income by adjusting the mentioned prices have caused the upward trend of inflation to stop; However, because the government budget deficit is still high, inflation is also high and resists reduction. This explanation is also compatible with the sharp jump in inflation at the end of 1404 and the beginning of 1405. The government has caused an inflationary shock by adjusting the prices at its disposal and the controlled prices; Because the jump and adjustment of those prices, including the exchange rate, has caused an increase in the price of CPI components and has shown itself in the form of an inflationary jump in the data. However, preventing the deterioration of the government’s financial needs and the growing budget deficit of the government has prevented the continuation of the upward trend of inflation. In other words, the adjustment of mentioned prices, including the exchange rate, which is a manifestation of hidden inflation, has caused an inflationary shock, but it has made the inflation process milder than what could have happened in the absence of those measures.

It seems that Mr. Bessant, the US Treasury Secretary, has either read Keegan’s article (1956), Sargent’s article (1981), Woodford’s article (1995), Sims’s article (2011) and Cochrane’s book (2021) well, or his assistants have written their summaries for him, and based on the analyzes contained in these articles, he has concluded by shaping Iran’s increasing budget deficit (not just high) towards inflation. triple digits and ultimately lead to hyperinflation. So far, his efforts have been effective to a large extent, but he has not yet achieved the success he wanted. In the coming months, what determines whether Iran’s economy will fall from the current point-to-point inflation, or whether it will remain at the same level of inflation, or whether it will experience another inflationary jump, depends on whether the government will be able to put a brake on its expenses and continue to adjust the prices under its control and deal with it or not? From this point of view, with the continuation of the blockade and sanctions, Iran’s economy has been placed in two difficult paths, which in any case, it is impossible to prevent the reduction of the welfare level of the society, and to imagine that there is a way to prevent it, is an unrealistic idea in the conditions of declining economic growth and negative economic growth.

With the impossibility of reducing government expenses and even the impossibility of preventing their increase (a large part of which is redundant and there is no good in it), inflation is still fragile, and changes of one percentage point in point-by-point inflation do not in any way mean the end of the era of increasing inflation. What the politicians should do so that the restriction of foreign trade, along with the impossibility of reducing the government’s expenses, does not cause pressure on the government’s open and hidden budget deficit and the risk of the economy rolling into the valley of increasing inflation, and what they should do so that the economic policy makers have the possibility to maneuver in policy making, is not in my area of ​​expertise. But what was analyzed indicates that Iran’s economy has temporarily stopped the increasing trend of inflation and entering into hyperinflation. But this should in no way be a cause for reducing concern and taking choppi (it means the handkerchief that is held at the head of the dance group of Kurds and Lehrs) and it is better to know that under any circumstances, Iran’s economy still has a long way to go before changing its path towards bearable inflation.

Dr. Taimur Rahmani / faculty member of Tehran University’s Faculty of Economics