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Economy

Why Are Iran's Food Prices Rising Faster Than Inflation?

November 1, 2013
Behrouz Mina
5 min read
Why Are Iran's Food Prices Rising Faster Than Inflation?
Why Are Iran's Food Prices Rising Faster Than Inflation?

Why Are Iran's Food Prices Rising Faster Than Inflation?

 

Over the past decade the price of food items has been constantly increasing across Iran’s domestic markets. But recently this increase has become a spike. Is this a phenomenon unique to Iran’s sanctions-hit economy?

These days, the average family residing in Tehran is paying  more than ever for all elements of its consumption basket. Iran's Central Bank reports that rice is  71.1 percent more expensive than the similar week last year, and red meat is up by 36.8 percent from the previous year. The increase for fresh fruit is 79 percent, for green vegetables 85.8 percent, sugar 42.5 percent and for chicken it is reported to be 46.9 percent.

If Iran's inflation rate  hovers around 41 percent, then it becomes clear that food prices have been increasing much more than average increase in the price of other goods. This can mean only one thing: Iranian households’ real income has been constantly declining. There has been little adjustment to workforce wages and many still receive the same pay as the last year. 

The question remains: why have food prices in Iran have almost doubled in a year? Have these prices increased because of inflation? Or have they increased because  food prices have increased in global markets? The UN's Food and Agricultural Organisation reports that Iran has harvested 14.5 million tons of wheat, which shows a five percent increase compared to the previous year. Overall Iran’s grain harvest increased 3.4 percent in 2012 reaching a total of 21.85 million tons, an average increase of 3.4 percent across board. This includes 3.2 million tons of barley and 2.4 million tons of rice.

This increase in harvest and the current existing reserve have prompted many analysts to predict Iran’s grain imports would decrease as much as 67 percent in 2013. In the first four month of current Iranian calendar Iran imported 60 percent less wheat. Still it imported 963,000 tons of wheat, at an estimated value of 400 million USD. Switzerland, Britain, and Turkey were the main exporters of wheat to Iran. Germany, the Netherlands, Italy, Russia, Austria, Uzbekistan, Hong Kong, and Turkmenistan were other exporters of wheat to Iran. Ahmadinejad’s administration centrlalised the  import process, which had been decentralised by previous governments. Thus Iran’s government is the major supplier of grain and other agricultural products, a role which is justified using social justice arguments. However, as many point out, the government’s intervention in the marketplace is also a source of price instability. Despite the government’s intervention in the market, the price of rice has increased by 71.1 percent compared to the last year. Although its global price has been declining since spring 2012.

It is too soon to judge the current administration’s performance in food markets. The previous administration, for its part,  used its authority to intervene in the market liberally, creating more distortion and less stability. For example  a rumour circulated in Tehran last summer that Ahmadinejad’s administration, in claiming to combat special interest group, revoked the licenses to import hay and forage. Then the authorities moved to handle the import themselves and botched the job. The price of forage increased astronomically. At the same time the government hesitated to purchase farmers’ wheat harvest, which it usually guarantees to buy at pre-arranged prices. There were a shortage of forage and a surplus of wheat in the market. Wheat farmers began to sell their harvest to cattle owners to prevent a loss. By the time the government began the forage import process it was already too late. The price of red meat increased by 42.7 percent in the summer 2013 compared to summer 2012. 

Given the subsidies and government’s imports of beef this is a noticeable increase. In the same period the price of poultry increased by 15.7 percent, much less than the inflation. Why the trend for two items in the same category could be this different?

The distortion in food market is not limited to protein items. In the summer and early fall, the price of fresh fruits increased 70 percent compared to the previous year, a rate twice higher than inflation. The price of fresh vegetables increased by 85.8 percent in early October and it was 91 percent more expensive in summer 2013 than the previous summer. This increase in the price of agricultural products is attributed to the increase in wages and energy costs in rural areas.

It is true that in the past fruits exports have been encouraged and the domestic supply of fruits might have decreased because of exports. However the government imported fruit from less expensive producers and  prices remained stable. However this time it does not seem the foreign trade has reduced the supply. The products are available on the market, but at much higher prices.

In Iran we are facing a market where there are a number of sources for volatility. The government intervenes in the market as an importer, a regulator, subsidy provider and a major buyer. The aggregate effect has been a reversal of domestic food prices in Iran. When prices in global markets are declining, they are increasing in Iran, as demonstrated in the case of rice. The declining value of the Rial has not helped the situation either.

Instead of bringing social justice to the market place, the Iranian government’s actions have reduced the real purchasing power of Iranian households. In the food market Iranians’ ability to afford the increasing prices is diminishing much faster than what the inflation rate would suggest. 

Currently Iranian politicians are reviewing the government's subsidies policy. Those who argue for limiting subsidies say that Iran’s urban middle class families do not need to receive cash handouts like lower income families. But they do not mention that food prices have increased at a rate much faster than inflation. This cannot be blamed on global markets. Iran’s government needs to begin a new set of economic reforms, if it wants to make food prices manageable in Iranian homes across the country.  

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