Iranian Officials Contradict Each Other on Gas Prices and Inflation

In the wake of the hike in gas prices, Iranian officials can’t agree on the figures for inflation, says Majid Mohammadi

“Based on economic patterns following an increase in gas prices, the inflation resulting from this increase is calculated to be around two percent,” the deputy president of Iran’s Planning and Budget Organization recently stated.

Officials of the Islamic Republic, however, cannot agree on how to predict inflation numbers in the current situation. “Calculations by the Economic Studies Department at the Central Bank show that the inflationary result from today’s increase in gas prices will be around a four percentage point for the year,” Abdonnasser Hemmati, the Governor of Iran’s Central Bank, said. On the other hand, Mohammad Ali Dehghan, the Deputy Minister of Economic Affairs and Finance, believes that inflation will “only” reach around 2.5 percent.

What all of these calculations ignore is that gas is treated as a merchandise like furniture or decorations, whereas its production, distribution and pricing has little structural relation with other goods. But a more expensive gas is not only the money that a family pays to fill up the tank of its car. The rise in the price of gas affects all other goods, from production to distribution. The villager who produces grapes or pottery needs gas to get these goods to the market, so an increase in gas prices sends the prices of these goods up as well. Somebody who might not own a car but whose son or daughter goes to school using a car service will find that when gas is more expensive the cost of this service goes up too.

It is from this detached point of view toward gas that the deputy minister for the economy says: “the increase in gas prices does not mean an increase in the prices of other goods and services.” Immediately after gas prices were increased, Islamic Republic officials ordered all government agencies not to increase the prices of their services — as if the government produces and offers all goods and services and inflation will stop rising if the government orders it to.

According to a study by Iran’s Consumer Protection Agency, for every 10 percent increase in the price of gas, inflation rises by approximately two percent. This means that with the recent increase in gas, inflation prices will rise from 10 percent (for rationed gas) to 60 percent (for the price of gas in the open market). And because people pay a combination of these prices, inflation will rise by a percentage between the two. But since the volume of rationed gas is very low — two liters per day for a private sedan, for instance — people have to buy more gas at the open market price, meaning that inflation is certain to exceed 10 percent.

The other point is that usually, after rationing, gas consumption falls but gradually increases and even surpasses the pre-rationing level. That is why we cannot argue that gas consumption is going to fall in the long term or even the medium term and, as a result, its inflationary effects will accordingly diminish as well.

Related Coverage:

Who Decided to Raise the Price of Gas in Iran and Why?, November 18, 2019

Is Gasoline Really Cheap in Iran?, November 17, 2019

Who Benefits From the Rise in Gas Prices — The Rich, the Poor or the Regime?, November 16, 2019

Iranians Protest After “Sad but Necessary” Decision to Raise Gas Prices, November 15, 2019