The latest data published by the Central Bank of Iran (CBI) show that Iran’s point-to-point inflation in November reached 39.9 percent, the highest level in the past five years. However, point-to-point inflation is increasing at a slower rate, consistent with the appreciation of the rial in November. This development shows that sanctions have been successful until now but also indicates that current U.S. sanctions may not be strict enough to exert maximum economic pressure on the regime in the manner envisioned by the White House.
A country’s point-to-point inflation rate measures change in the consumer price index (CPI) for a particular month in comparison with the same month in the previous year. November’s 39.9 percent rate, a three-point increase from October, is less than the 5.5 increase from September to October and the 7.2 increase from August to September.
Despite this deceleration, Iran’s average yearly inflation rate, which measures change in the CPI between one 12-month period and the previous 12-month period, increased to 18.4 percent in November, compared to 15.9 percent in October and 13.5 percent in September. The CPI was 153.6 percent in November, compared to 150.1 in October, 145.6 in September, and 140.1 in August. Donya-ye-Eghtesad, Iran’s leading economic newspaper, forecast that the yearly inflation rate would reach 30 percent in the 2018-2019 fiscal year.
If the forecasts hold true, the 2018-2019 inflation rate would mirror the inflation rate of the 2012-2013 period, at the height of the Obama administration’s crippling economic sanctions campaign. At present, as in the 2012-2014 period, the inflation rate for top-income deciles in recent months was higher than the inflation rate for low-income deciles. The economic collapse of the 2012-2014 period and the associated high inflation led the clerical regime to return to the bargaining table and negotiate the 2015 nuclear deal, formally known as the Joint Comprehensive Plan of Action.
The decreased point-to-point inflation rate is consistent with the appreciation of the rial in October and November. From early September to late September, the dollar exchange rate increased from 112,000 rial to 190,000 rial. By the end of October, though, the exchange rate was in the 140,000-150,000 range. In November, the rial appreciated even more, reaching an exchange rate of 120,000 per dollar.
Obama was able to impose high inflation on Tehran for two consecutive years. But if the present deceleration of the point-to-point inflation rate continues, the average yearly inflation will likely decrease in the 2019-2020 fiscal year. This may be a sign that the sanctions Trump imposed this year, especially the sanctions on Iran’s energy sector, fell short of the expectation.
Inflation is a key measure of the impact of U.S. sanctions on Iran, as important as the GDP growth rate, exchange rate, and unemployment rate. Inflation affects how the majority of Iranians perceive the effects of Tehran’s policies on their daily life, from grocery shopping to transportation. The key to success for Trump’s maximum pressure strategy is to cut the inflow of hard currency into Iran from oil exports, significantly decrease Iran’s GDP by limiting non-oil trade, and force Tehran to spend its currency reserves at a fast pace.
The U.S. has successfully pressured Tehran until now. Key indicators such as projected GDP growth and inflation testify to the strength of U.S. sanctions up to this point. Yet the decelerating rate of inflation and appreciation of the rial may be a sign that the markets doubt whether U.S pressure will be forceful enough in the coming months. As such, the United States must increase pressure on the clerical regime by significantly cutting Tehran’s oil exports, limiting its access to hard currency, and sanctioning additional entities that ensure the stability of Iran’s economy and Tehran’s grip on power.
Saeed Ghasseminejad is a senior advisor on Iran at the Foundation for Defense of Democracies. Follow him on Twitter @SGhasseminejad. Follow FDD on Twitter @FDD and follow FDD’s Center on Sanctions and Illicit Finance @FDD_CSIF. FDD is a Washington-based, nonpartisan research institute focusing on national security and foreign policy.