Inflation is one of the main indicators for measuring the performance of the Iranian economy. Monthly inflation rates refer to the change in the price of goods within one month. There is a slow criterion which is the total inflation within 12 months, which is an indicator of the annual performance, and the deep trend of the economic performance. The Central Bank of Iran (CBI) announced that it plans to limit annual inflation at 22 percent (with a margin of increase or decrease of nearly two percentage points), after it had reached the level of 41.2 percent in 2019, setting one of two records over the past four decades.
This paper discusses inflation scenarios in Iran, in both its monthly and annual versions, over the remaining five months of the current Iranian fiscal year, in view of several influences, including the outcome of the US elections and internal developments.
Inflation in Iran by figures: a comparison of two years
The CBI's report on its inflation forecasts for the current year was remarkably optimistic. This optimism is attributable to the growing hopes that Iran will be relieved from the influence of sanctions on the economic performance. This optimistic trend was also relatively supported by international reports. In a periodic report, the World Bank (WB) announced that inflation in Iran will be 34.1 percent, to settle in 2021 at the level of 27.1 percent, then at 23 percent in 2022, in a descending trend that indicates expectations of an improvement in the Iranian economy in the current year and the years ahead.
However, the performance of the Iranian economy was contrary to those expectations, given the continued pressure of the sanctions and their internationalisation (by placing Iran on the blacklist of the Financial Action Task Force (FATF)) as well as the impact of the spread of the coronavirus on the economy and trade exchange. The result was a continuous collapse of the Iranian stock exchange, reaching 39 percent as of 26 October 2020, and a collapse in the price of the Iranian currency by more than 100 percent within seven months.
The economic performance was reflected on the inflation index. The monthly inflation rate in the seventh month of the Iranian year was nearly 7.01 percent (compared to a monthly inflation of nearly 1.7 percent in the same period last year). The average monthly inflation rate during the first seven months of the current year was 3.9 percent, compared to 1.7 percent for the first seven months of last year. The Statistical Center of Iran (SCI) announced that the total annual inflation during the new year reached 31 percent until the seventh month. This means that Iran has recorded this rate of annual inflation, even assuming that prices will stabilise at this level during the next five months.
According to the SCI, the annual inflation rate over 12 months in the seventh month of the current Iranian year was 41.4 percent, after it decreased in the first month of the current year to 19.8 percent, to record an increase of nearly 13.1 percent compared to the annual inflation recorded in the same month last year.
In the context of monthly inflation, the rate reached a peak of 6.4 percent in the fourth month of the current year, being the second highest peak in three decades of monthly inflation figures, before hitting a record during the past four decades, settling at 7.01 percent in the seventh month of the year.
In the context of annual inflation (total inflation over 12 months), the process was strikingly reversed in the current year, compared to last year. Annual inflation rates decreased from 51.4 percent in the first month of last year to 28.3 percent in the seventh month of the same year, indicating that the Iranian economy has adapted to conditions after a wave of inflation that was the second strongest in four decades. However, the process has completely reversed in the current year. While the annual inflation rate was 19.8 percent in the first month, the same rate reached 41.4 percent in the seventh month of the same year.
While the inflation indicators in both its monthly and annual versions during the remaining five months of the current year will be dependent on several influences, including the outcome of the US elections and their repercussions for the Iranian economy, there are other indicators that control the course of inflation over the next five months, the most important of which are the following:
1. The pessimistic scenario: this scenario assumes that inflation rates will continue to rise according to an algorithm that governs the inflation rate from the beginning of the year. According to those calculations, the monthly inflation rate for the next five months will be 8.3 percent so that the price index will settle at 389.5 points in the last month of the current year, which in turn means an increase of nearly 189 points compared to last year, or an annual inflation rate of 94.2 percent at the end of the current year.
2. The optimistic scenario: this scenario assumes that the inflation rate will continue during the next five months at levels close to the monthly inflation rate in the first seven months of the year (3.9 percent). If this does happen, the total increase in the price index in the last month of the current year will be at 316.3 points (compared to nearly 200.5 points in the last month of last year), which amounts to an increase of nearly 116 points, so that the annual inflation rate would be 57.8 percent.
3. Moderate scenario: within the framework of a moderate scenario, monthly inflation could be conceived at the rates of the past three months (4.7 percent). This means that the price index would reach 327 points in the last month, amounting to an increase of nearly 116.5 points in the index, which in turn means an annual inflation of nearly 64.1 and 71.1 percent in the last two months of the current year.
In general, it can be said that those three expectations are the most important patterns that are supported by historical data, the traditions of the Iranian economic field, and the behaviour of the economy over the past years. While it is possible to conceive several other scenarios based on the effectiveness of other influences at the Iranian economic level, including the possibility of US openness to Iran after the victory of the Democratic candidate Joe Biden in the US presidential elections, most of the scenarios, even the optimistic ones, indicate that the annual inflation rates during the current year would not be less than 50 percent. This amounts to the largest inflation rate over the past five decades. On the other hand, the pessimistic scenarios underline the possibility of reaching an annual inflation rate in the first month of the next Iranian year (March/April 2021) that is above the level of 100 percent, which would be unprecedented in Iran’s contemporary history.
Shereen Mohammed | 25 Oct 2020
EPC | 19 Oct 2020
Shereen Mohammed | 13 Oct 2020