An Estimation of the Inflationary Impacts of Adjusting Prices of Energy Sources in Iran، under Assumptions of Gradual and Abrupt Changes

Given the high share of energy subsidies in Iran (25. 9% of GDP in 2006)، an assessment of likely inflationary impacts of their removal is needed to provide policy makers with the requisite guidance for appropriate decision making. This paper thus assesses the likely inflationary impacts of adjusting energy prices using an input- output model to evaluate cost push and demand pull inflationary impacts under scenarios of sudden and gradual changes. The results indicate that if the prices of all energy sources are increased at once، the consumer price index (CPI) will increase by 48. 6 per cent and producer prices will rise by 63. 6 percent. On the other hand، if prices are increased gradually over four years the average annual additional inflation will be 10. 5 percent. The model further predicts a deman pull inflation of the order of 2. 7 percent، which will result in an overall additional inflation of 4 percent، taking into account the money multiplier of 1. 5.