Iran’s annual inflation reached a new high in March, but experts predict that the country will enter hyperinflation.
Hyperinflation refers to a high-speed, often accelerating, inflation that rapidly erodes the local currency (rial in this instance) while all goods prices increase exponentially. People will try to reduce their national currency holdings and move to safer assets.
Late March, the Central Bank of Iran declared that the annual inflation rate is 46.5 percent. Although official inflation rates are usually lower than actual prices, a 46.5 percent inflation rate is still among the highest in Iran for more than 30 years.
Although the bank did not reveal the point-to point inflation for March 20th, it did provide the price index for that month. This can be used to calculate point-to point inflation. The price index for March was 794.3. This represents a 64-percent increase in point-to–point inflation compared with the 484.6 period.
It’s the second such figure Iran has recorded since World War II. Inflation rates are expected to rise due to the devaluation and increase in the rial’s value from 260,000 per dollar to around 540,000 over the past 12 month. Official figures indicate that food prices have been increasing much faster than previously estimated, with 70-100% annual inflation reported by official statistics for basic food items like meat and dairy.
Hyperinflation is often associated with some form of stress to the government budget, such as socio-political upheavals, a collapse in aggregate supply of needed commodities, or obstacles in exports, all of which are seen in Iran’s economy.
Hyperinflation is defined differently by Phillip Cagan, an American economist. It refers to when the monthly inflation rate exceeds 50%. That’s equivalent to a yearly rate at 12974.63%. International Accounting Standards Board defines it as “when the cumulative inflation rate for three years approaches or exceeds 100 per cent.”
The Islamic Republic is currently experiencing the most aggressive anti-regime protests in its history. Rising inflation could lead to more protests.
The US sanctions have caused a severe revenue shortfall for the regime. The Central Bank printing more money is aggravating the situation, and probably leading to hyperinflation.
Siamak Ghasemi is a business analyst
In an article published on April 1, Khabar Online website cited market analyst Siamak Ghassemi as saying that the data released by the government about market liquidity and money supply bears “important and dangerous information” about the country’s economy in the coming months.
“The growth rate of the monetary base has reached 38 percent and liquidity has reached 34 percent. This unprecedented gap means that the government is printing more money and making up for the budget deficit by heavily borrowing from banks and forcing them to borrow from the central bank,” he said.
Ghassemi highlighted that the sharp growth of the monetary base and the significant budget deficit as well as increasing lack of trust in the government’s ability to bounce back as well as the continued devaluation of the rial will put Iran’s economy on the brink of a three-digit inflation rate or hyperinflation.
The former governor of Iran’s central bank Abdolnasser Hemmati, who is among the outspoken critics of the current administration, also said last week that “in order to control inflation and rial’s exchange rate, the government should take serious measures to reverse growing liquidity.”
The money supply rises quickly when the central bank prints money without adequate economic growth or foreign currencies revenues. This leads to currency devaluation as well as inflation. Printing money is primarily motivated by government borrowing from Iran’s Central Bank to cover its budget deficit, which is 50 percent.
High inflation has plagued the Islamic Republic since 2019. However, the current Iranian year’s raging inflation was quite different than in previous years. In May 2018, the government ended an annual food import subsidy worth at least $10 million. This immediately caused steep price rises. The value of the national currency fell, which made imports more expensive. Iran’s ruler Ali Khamenei has dubbed the new year as “the year of controlling inflation”, a promise also repeated by President Ebrahim Raisi, but reminiscent of similar slogans in previous years.