What is the real reason for the decrease in inflation in the month of June?

What is the real reason for the decrease in inflation in the month of Khordad?

According to Iran Gate, the release of inflation statistics for the month of Khordad 1402 showed a decrease of 12 percentage points compared to the recent upward trend. Many observers and media audiences in the country found the statistics provided by the government to be unreliable, expressing their surprise about this issue.

Although the media in Iran has been heavily influenced by recent events in Russia, the significant decrease in inflation in Khordad 1402 has been a topic of discussion in economic media circles. Many viewers believe that the Rouhani government intends to manipulate public opinion by tampering with the statistics and figures provided by the Iranian Statistical Center.

But what is the reality of the situation? Has the government manipulated the inflation statistics for Khordad 1402? This report answers this important question and explains why, despite the intensification of price increases, the government is reporting a 12 percentage point decrease in the year-on-year inflation rate for the current year’s Khordad month.

What is year-on-year inflation?

To better understand this issue, the audience must be familiar with the concept of inflation point by point. Before defining this economic term, it should be known that generally a specific time interval should be considered in calculating the inflation rate. For example, 12-month or monthly intervals are among the most common calculation periods.

Point-to-point inflation is usually calculated by comparing the price index over a one-month period with the same period in the previous year. In other words, to calculate the point-to-point inflation rate for June of this year, the average cost index of the household basket in June 2023 should be compared with the price index of the household basket in June 2022. The change in price indexes is known as the point-to-point inflation rate for June 2022, which is currently the subject of this report.

The removal of the 4200 currency notes came with the help of the government.

It is worth mentioning that everything is related to the month of Khordad, 1401. It should be noted that the government of Ebrahim Raisi intentionally announced the removal of preferential currency in Ordibehesht, 1401. This event occurred in the final days of the previous year and immediately after the removal of the 4200-toman currency, Iranian citizens were faced with a sudden and sharp increase in the prices of household consumer goods in the market. This sudden and overnight price surge caused the monthly inflation rate in Khordad, 1401 to exceed 125%.

This is despite the fact that the monthly inflation rate in Ordibehesht, 1401 was around 3%, and this increase signifies a four-fold jump in the monthly inflation rate in Khordad of the previous year. But what does this have to do with the year-on-year inflation rate in the current Khordad?

To answer this question, we need to revisit the concept of year-on-year inflation, which was mentioned earlier. It means comparing the price index in Khordad, 1402 with the corresponding period in 1401. This month of the current year is the benchmark for calculating the year-on-year inflation rate. As mentioned before, the sudden and unprecedented surge in the prices of essential goods and the household consumption basket in Khordad of the previous year will determine the outcome.

The reason why this price hike has not occurred during the month of Khordad this year and prices have not faced a sudden upward shock is that the rate of price increase in Khordad this year, compared to Khordad 1401, has been about 12 percentage points slower. This does not mean that household consumer goods have become cheaper in the past month, but rather that the speed of price increase for consumer goods has decreased only compared to the same period last year.

Suppression of exchange rates

On the other hand, another factor that has contributed to the point-to-point reduction in inflation in Khordad 1402 is the suppression of exchange rates in the free market by the central bank. As mentioned in previous reports, Mohammadreza Farzin, the head of the central bank, made a commendable intervention in the currency market during the last days of the last week of Khordad, considering this action necessary for creating stability in the economy.

However, evidence shows that this time the central bank has not intervened in the currency market through money injection to suppress the price of the dollar. Instead, the central bank has gone after the demand side and suppressed the demand for currency in the market.

If we overlook the very important point that this action by the central bank can have consequences in the country’s economy, it should be noted that the sudden suppression of the 5,000-toman exchange rate can temporarily control the rising trend of essential goods prices, even though it did not have a significant impact on the 12% decrease in the inflation rate in Khordad 1402 compared to the underlying cause mentioned earlier. However, we cannot ignore its effectiveness.

This is not an achievement.

As mentioned, if the government had not taken any action during the past month, this decrease in the inflation rate would still have occurred. Even many experts and economists had predicted that President Raisi’s government would use this event as an achievement for itself.

Looking at the headlines of the government-supporting media’s economic reports, we can see that media activists have referred to this event as a great achievement for President Ebrahim Raisi’s government. This is despite the fact that Raisi’s government’s policies had no impact, whether right or wrong, on the decrease in the inflation rate in Khordad 1402, and the economic team of the thirteenth government cannot make a hat out of this straw for themselves.