What is the Real Reason for the Inflation Drop in June?

What is the real reason for the decrease in June’s inflation?

What is the real reason for the decrease in June’s inflation? According to Iran Gate, the publication of June 2023 inflation statistics showed that point-to-point inflation, contrary to the upward trend in recent months, has decreased by 12 percentage points. Many observers and media audiences in the country expressed surprise at this issue and considered the statistics provided by Raisi’s government to be invalid.

Although the media atmosphere in Iran these days is heavily influenced by recent developments in Russia, in economic media circles, the significant decrease in point-to-point inflation in June 2023 has been a topic of discussion. Many audiences believe that Raisi’s government, by manipulating the statistics provided by the Iranian Statistics Center, intends to mislead public opinion.

But what is really happening, and has the government manipulated the June 2023 inflation statistics? This report addresses this important question of why, despite the intensified trend of price increases, the government reports a 12 percentage point decrease in point-to-point inflation in June of this year.

What is point-to-point inflation?

To better understand this issue, the audience must be familiar with the concept of point-to-point inflation. Before defining this economic term, it should be known that in general, calculating the inflation rate requires considering a specific time period. For example, 12-month or one-month periods are among the most common cases calculated.

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

Elimination of the 4200 currency helped the government on paper

Everything relates to June 2022. It should be reminded that in May 2022, Ebrahim Raisi’s government announced its intention to eliminate the preferential currency. This event occurred in the final days of May last year, and immediately after the elimination of the 4200 Toman currency, Iranian citizens faced a sudden and severe increase in the prices of household consumer goods in the market. This sudden overnight price jump caused the monthly inflation of June 2022 to reach more than 125 percent.

Meanwhile, the monthly inflation for May 2022 was around 3 percent, and this increase means a fourfold jump in the monthly inflation rate in June of last year. But what does this have to do with the point-to-point inflation rate for June of this year?

To answer this question, one must once again refer to the concept of point-to-point inflation mentioned earlier, which is the comparison of the price index in June 2023 with the same period in 2022 as the basis for calculating this month’s point-to-point inflation of this year. As mentioned, the sudden and unprecedented jump in the prices of essential goods and the household consumption basket in June last year will determine the result.

Because this jump did not occur during June this year, and prices did not face a sudden upward shock in the market. In other words, the rate of price increase in June this year was about 12 percentage points slower compared to June 2022. This event does not mean that household consumer goods became cheaper last month, but only that the speed of price increases for consumer goods has decreased compared to the same period last year.

Currency rate suppression

On the other hand, the suppression of the exchange rate in the free market by the central bank is another factor that has led to the decrease in point-to-point inflation in June 2023. As mentioned in previous reports, Mohammadreza Farzin, the governor of the central bank, defended the maximum intervention of the government and the central bank in the currency market in the last days of the final week of June, considering this action necessary to create stability in the economy.

However, evidence shows that this time the central bank has not suppressed the dollar price through currency injection into the market, but rather it has targeted the demand side and suppressed currency applicants in the market.

If we overlook the very important point of what consequences this action by the central bank could have on the country’s economy, it should be known that a sudden suppression of about 5,000 Tomans in the dollar rate can, for a while, even if briefly, control the upward trend in the prices of essential goods. Although this factor has not been influential in the 12 percentage point decrease in point-to-point inflation in June 2023 compared to the first reason mentioned, it cannot be ignored either.

This is not an achievement

As mentioned, even if the government had done nothing throughout the past month, this decrease in point-to-point inflation would still have occurred. Many experts and economists had also predicted that Raisi’s government would use this event as an achievement for itself.

By looking at the headlines of economic reports from media supporting the revolutionary government, it can be understood that media activists have referred to this event as a remarkable achievement for Ebrahim Raisi’s government. However, whether the Raisi government’s policy-making is right or wrong has had no impact on the reduction of the point-to-point inflation rate in June 2023, and the economic team of the thirteenth government cannot make a cap for itself from this felt.