Tehran, Dec 27, IRNA

The inflation in Iran's service sector is still high and some believe this constitutes the main obstacle to achieving single-digit inflation rate.

In its opinion piece, Iran Daily, brings the issue into the spotlight and puts forward suggestions for lowering the inflation.

The full text follows:

Central Bank of Iran figures shows that inflation in the services sector is still quite high despite the decline witnessed in the goods sector in recent years.

This has been a main obstacle to achieving sustainable single-digit inflation in the past few years. CBI figures indicate that during October 23-November 21, point-to-point inflation in the goods sector reached five percent; whereas, that of the services sector amounted to 15 percent.

Therefore, inflation in the goods sector, which is included in the tradable sector category of the Consumer Price Index (CPI) report, has declined remarkably under the influence of factors such as controlling forex rates fluctuations and inflationary expectations, given the market supply and demand.

On the contrary, the services sector inflation, which is calculated on the basis of government pricing as well as salaries and wages, is still quite high. Past experiences and CBI figures show that not only has moves by state-run organizations to price services failed to bring inflation down, but it has also acted as an impediment to achieving this.

In case the government set the tariffs, salaries and wages, stipulated in the contracts of the services sector, according to CBI target rate, it can facilitate and speed up the process of curbing inflation.

Previously, it was maintained that government pricing system can help regulate market prices and, thus, control inflation. This is while, as shown by statistical studies, it actually hinders the entire process.

In the past few days, a number of state officials have requested the government to dissolve pricing organizations in the Sixth Five-Year Economic Development Plan (2015-20).

Consumer goods in the household sector are categorized as tradable and non-tradable. Tradable goods can be sold in locations far from where they are produced and, therefore, can be exported and imported. They include industrial and agricultural products as well as a part of services.

Housing units and some of the services are categorized as non-tradable goods. A group of tradable and non-tradable goods constitutes the price index of a number of products and consumer services in Iran's urban areas. Studies show that the total monthly inflation during October 23-November 21, stood at 0.7 percent, of which the figure for tradable and non-tradable goods amounted to 0.5 percent and 1 percent, respectively. This shows that inflation in the non-tradable sector is still high, pushing the total inflation up.

Compared to the same period of last year, the point-to-point inflation during October 23-November 21 (10.1 percent) indicates changes in the CPI. This figure is on the verge of turning into a single-digit number. During September 23-October 22, the point-to-point inflation of tradable goods was 6.3 percent whereas 30 days later it dropped by 1 percent to reach a four-year low of 5.2 percent. What makes it quite an achievement is that in some months in the past four years, the figure even exceeded 60 percent. Reduced fluctuations in free market forex rates as well as the downward trend in inflationary expectations have both contributed to the remarkable drop in tradable sector inflation over the past two years.

During October 23-November 21, point-to-point inflation of non-tradable goods reached 15.8 percent. The same inflation rate was witnessed in 2012. In the past few years, the inflationary fluctuation of non-tradable goods has been subject to slower rises and falls. For instance, highest point-to-point inflation the sector experienced in the past four years amounted to 26 percent, which was 34 percent lower than the four-year high record of the tradable goods (60 percent).

In addition, during May 22, 2013-November 21, 2015, the point-to-point inflation of tradable goods declined by more than 55 percent, while the drop in the inflation of the non-tradable goods only amounted to 10 percent in the same time-span.

Among the reasons conducive to the wild fluctuations of inflation in tradable sector is their great dependence on forex rates. Since the latter has undergone dramatic changes in the past few years, the former has also witnessed wild fluctuations. Instability in forex rates impacts the price of tradable goods after a brief delay. A rise in hard currency rates leads to an increase in the price of import items. Since a large number of domestic goods require imported raw materials, a hike in forex rates also affects their prices.

The government's success to keep forex prices down in the past few years, increased the share of imported goods in the consumer basket of Iranian households. The same trend was experienced in the changes of the CPI, particularly in tradable items, following a rise in forex rates. What is interesting is that supply and demand in global markets have greater impacts on tradable items than non-tradable goods. In the past 12 months, in line with the downwards trend in oil prices, the world has also witnessed a decline in the inflation in goods sector. Some goods in the international market are currently in excessive supply. This has resulted in a fall in the inflation in the market for domestic goods. Nevertheless, the non-tradable sector does not feature the same trend.

Apparently, to achieve a sustainable single-digit inflation, the government is required to regulate and control the inflationary trends of the services sector, such as tariffs, wages and salaries, in proportion to the inflation goods in goods sector or the CBI target.

© IRNA 2015