Economy Minister Ali Tayyebnia said the government has reached the stiff core of the inflation and that it has become difficult to fight it.
He argues that reducing the inflation rate to lower than 8% has never been the policy of President Hassan Rouhanis administration in the first place, as it could have grave consequences for the economy.
Teymour Rahmani, business school professor at the University of Tehran, defends the policy in an interview with the Persian weekly Tejarat-e Farda.
Rahmani explains that Irans economy does not have the capacity for lower inflation rates, noting that the index might even witness a slight increase in the upcoming months, driven by rials depreciation against the dollar.
Average inflation rate has been registered at 8.6% for two consecutive months, marking a pause in a downtrend experienced in the preceding months. The average monthly growth in the Consumer Price Index since the beginning of the current Iranian year (March 20, 2016) stands at 0.8%, which the government has called a redline, the crossing of which threshold should be considered a wakeup call as it marks a shift in monetary policies.
The overall CPI (using Iranian fiscal year to March 2012 as base year) stood at 252.9 in Azar (the Iranian month ending December 20), indicating a 1.4% growth compared with the previous monththe highest over the past 18 months.Therefore, the "redline" has already been crossed.
Since August 2013 when Rouhani took office, the government managed to keep in check factors contributing to high inflation.
One year into office, the government cut inflation to half and then pulled it below 20% in September 2014, and then to around 15% in March 2015. The administration now prides itself in having lowered inflation below 10% for the rolling year ending June 20 for the first time in a quarter century.
The government has fulfilled its promise of lowering inflation to the single-digit territory, Rahmani said. Insisting on further pulling down the rate is not economically logical.
The economist argues that lowering the inflation rate further could lead to increased unemployment and exacerbated recession.
Iranian industries are grappling with a long-tanding slump. Manufacturing has been in deep recession as a result of sanctions imposed for years on the Iranian economy over Tehrans nuclear program, among other reasons.
Many industries are short of cash, amid the governments credit crunch resulting from economic isolation and falling oil prices.
Rahmani believes that because of structural problems in Irans banking system, contractionary policies put the most pressure on banks, which find it difficult to provide facilities for industrial firms.
There are factors that make lowering the inflation rate costly. This is measured by a factor known as sacrifice ratio in economics. Falling inflation could involve a much higher sacrifice ratio, he said.
The sacrifice ratio is an economic ratio that measures the costs associated with slowing down economic output to change inflationary trends. The ratio is calculated by taking the cost of lost production and dividing it by the percentage change in inflation, and its quotient gives the loss of output per 1% change in inflation, according to Investopedia. If inflation is becoming a problem, central banks will try to cool economic growth to reduce inflationary pressures. However, this reduction in output costs the economy in the short run and the sacrifice ratio tries to measure that cost.
> Forex Shock
According to Rahmani, it will most likely be difficult for the government to stabilize inflation at this rate.
Considering the increasing foreign exchange rates, it is hard to maintain the inflation rate at this level. It is even likely that the inflation rate would increase, due to the increasing value of dollar against rial, he said.
Last week saw Irans currency depreciate to 41,900 rials against $1its lowest ever. It marked a 16% loss in the value of rial against the dollar in the past few months, although rial has become stronger in the past couple of days. Every dollar was traded for 38,830 rials in Tehran's market on Sunday.
While making Iranian exports more attractive in overseas markets, the depreciation will increase the cost of imports, leading to higher prices for food and other products.
The recent forex shock will bring about a price shock as well, consequently increasing commodity prices. Therefore, inflation rate cannot stay put at 8.6%; it will go up, Rahmani said.
Rising exchange rates contribute to inflation by increasing the prices of imported commodities. As imports account for a sizable portion of commodities involved in the consumer price index, high exchange rates mean rising prices and thus higher inflation.
On the other hand, since prices of imported capital goods and intermediate goods are included in calculating domestic manufacturing costs, a weak rial against the dollar means higher cost of domestic production, hence increased inflation.
Fluctuating foreign exchange rates have had a significant impact on CPI growth in Iran, which was evident from rising inflation after 2012, as it exceeded 40% during the previous administration.
Fluctuations in foreign exchange rates are one of the main reasons behind inflationary expectations in Iran, which in turn have a short-term effect on inflation.
Soon after the exchange rates went through a steady phase two years ago, inflationary expectations tempered and inflation subsided with it.
Rahmani believes that it will take months before the rial's depreciation translates into a rise in inflation.
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