By Kamran Dadkhah
The price index and inflation rate (the rate of growth of price index) are among the most important data compiled by any government. Many economic and commercial decisions hinge on the inflation rate and many commercial contracts explicitly mention the index.
I should mention that we talk of the index and the inflation rate but in reality there are more than one index. For example, in the United States there are consumer price index and producer price index (not to mention the indices for different regions and cities).
For Iran there are urban and rural indices. In all countries in the world the price indices are compiled and reported by one government organization. For instance, in the United States it is the Bureau of Labor Statistics (BLS) that reports the price index. It is totally wrong and detrimental to the health of an economy if two different organizations come up with two different indices. But this has been going on for some time in Iran; both, Bank Markazi (Central Bank of Iran) and the Statistical Center of Iran, compile price indices and report inflation.
In addition, the data should be compiled based on scientific methods. The process should be open to the public and university scholars and researchers should help to improve the data collection and compilation. For instance, the BLS in the US is using chained index so that the weights of different items are updated continuously.
We don’t know if the technique is known or used in Iran. Another important characteristic of the inflation rate is that people feel it with their flesh in their daily life. The government can lie about the growth rate of the GDP and many people may not pay attention or dispute it.
But inflation rate is felt by every family in their daily and monthly expenditures. Therefore, lying about inflation by the government would be self-defeating. Recently, the Iranian government has claimed that it had brought down the inflation rate to a single digit.
According to the data published by Iran’s Statistical Center the inflation rate in Khordad (third month of the Iranian calendar year starting March 20) compared to the same month last year had been 7.4 percent.
The rate for the same period was reported 11 percent by the Central Bank (the rate for the fourth month, Tir is reported 9.9 percent).Yet the monetary data for the same period (Khordad last year to Khordad this year) show that the growth rate of money (M1) was 20.7 percent and for liquidity (M2) 24.1 percent.
The question is that how could we reconcile these data. Did the economy grow by 13 percent or even 16 percent? Even the higher inflation rates of Central Bank of Iran require growth rates of above 10 percent. Continuous high rates of inflation cause the same amount of liquidity to create even more inflation. First, inflation puts the expectations of inflation in the minds of consumers, workers and businesses. Inflation also increases the velocity of circulation, that is, the speed with which money changes hands.
The Iranian economy has been experiencing high rates of inflation for the past decades. Thus, the reported data, particularly by the Statistical Center of Iran are not reliable.
Kamran Dadkhah is an associate professor in the Department of Economics at Northeastern University, Boston, where his areas of interest are econometrics, macroeconomics, international economics, and Middle Eastern economies.