Study of economic variables affecting the inflation rate in Lorestan province: Fuzzy approach

Purpose: Iran's economy has been struggling with double-digit inflation for years. According to the published report of the central bank, Iran's economy experienced single-digit inflation for only four years in the past 44 years and double-digit inflation for the rest of the years. Even during five consecutive years leading to 2024, the inflation rate in Iran's economy has been above 40% and has had the longest duration in this period. The continuation of this situation is considered a serious warning for Iran's economy. This is because, in inflationary conditions, uncertainty about the future increases and, accordingly, the motivation for new investments and the trend of productive activities decreases. Besides, the level of inflation is not the same in all parts of the country. In this regard, there is a significant difference between the provinces of the country. Although the use of macroeconomic tools can reduce the inflation rate in the whole country, according to the characteristics of each province, the amount of inflation rate reduction or increase due to macroeconomic policies will be different. Therefore, in addition to identifying the major factors affecting inflation in the entire country, it is very important to identify the factors affecting inflation in each province according to the characteristics of that province. The higher inflation rate in Lorestan Province compared to the other provinces is due to various factors, the identification of which requires deep research. By identifying the effective factors in the higher inflation rate in Lorestan compared to the other provinces, practical solutions can be found to control inflation. Therefore, considering the importance of this issue in that province, the present research addresses the factors affecting the inflation rate there.
Methodology: In this research, the factors affecting inflation in Lorestan Province were investigated. For this purpose, the research model included the inflation rate in the province as a dependent variable, and the per capita production of the province, the ratio of industrial units of the province to the country, the amount of loans from the province to the country, the ratio of the collected taxes of the province to the gross domestic product of the province, and unemployment rate in the province, construction budget of the province, exchange rate, liquidity growth rate, and government budget deficit were determined as the independent variables. The research model was estimated using the fuzzy regression method for the time period of 2000-2022. The results showed that the factors causing inflation in Lorestan Province can be divided into national and provincial ones. The factors that cause inflation at the national level are the exchange rate, liquidity growth rate and government budget deficit, all of which have positive and significant effects on inflation. The results also showed that, among the provincial factors, the per capita production of the province, the construction budget of the province and the ratio of bank facilities had negative effects on the inflation rate. In other words, these factors caused a decrease in the inflation rate in the province. Among them, the share of the construction budget and the ratio of bank facilities in reducing the inflation rate has been higher than the per capita production of the province.
Findings and discussion: The results indicate that the variables of the ratio of taxes to the per capita production of the province, the unemployment rate of the province and the ratio of industrial units of the province to the country have had positive effects on the inflation rate in the province. In other words, the rise of these factors has been accompanied by the increase of inflation in the province. Among these factors, the unemployment rate of the province has had the greatest impact on the inflation rate, which indicates the existence of inflationary stagnation in the province. Next to the unemployment rate, the ratio of industrial units of the province to the country has played the biggest role in the inflation of the province. According to the results, one of the main reasons for the high inflation rate in the province compared to the average inflation in the country is the lack of supply or production in the province. This finding is confirmed by the existence of a positive correlation between inflation and unemployment, which indicates the stagnation of inflation in the province.
Conclusions and policy implications: To reduce the provincial inflation rate, it is suggested that the conditions of production in the province be facilitated and moves be made to eliminate production obstacles. Also, giving more credit and bank facilities to productive activities at the provincial level can serve to reduce the inflation rate in Lorestan Province in medium and long terms. In this context, to achieve a better result, there should be a careful monitoring of the allocation of bank credits. It is especially emphasized to direct bank credits towards semi-stagnant or closed enterprises that are located in industrial towns. According to the results, another important factor causing inflation is the low ratio of the production units of the province to the country, which has aggravated the inflation of the province. The lower the number of the production units in the province, the more goods is purchased from other provinces. Moreover, due to the cost of transportation, the price of goods in the province increases and shows higher inflation compared to the whole country. Therefore, it is suggested to identify the most imported goods from distant provinces to Lorestan Province through detailed assessments and direct bank credits to the production of these goods and creation of infrastructures.