Core inflation jump not what it seems

Last week a Central Bank of Iraq (CBI) official revealed that October year-on-year core CPI inflation jumped to 3.2% from just 1.87% in September, breaking a nine-month downtrend. At first glance, you might conclude that Iraq is now at the start of the same CPI uptrend that its neighbors, and indeed much of the developing world, have been experiencing all year as a result of money printing by the Federal Reserve. (See chart. Note that Iraqi core inflation excludes fruits and vegetables, nonalcoholic drinks, and gas and gasoline.)

Such a development would have important implications for the dinar. While in other countries central banks raise interest rates to control inflation, this remedy would be of little use in Iraq. As the leading role of state-sector banks and enterprises makes the economy relatively insensitive to rate hikes, the only way for the CBI to keep a lid on rising prices is to lower the local currency cost of imported goods through exchange rate appreciation. Dinar bulls might therefore take the core inflation jump as good news.

But it turns out the jump was due mainly to higher prices for housing, water, and electricity, which suggests that it may be more the result of October’s ten-fold increase in electricity tariffs than anything else. While it would still not be surprising if Iraqi inflation began to trend higher given what's going on in the rest of the region, the October number thus cannot be taken as evidence that this is already happening.

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  1. Core inflation jump not what it seems | Iraq Business News | Feed News from around the World - 1st December 2010

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