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Cablegate: Inflation Stable, but Price Pressures Increase As

VZCZCXRO0826
PP RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #1907 1750909
ZNR UUUUU ZZH
P 230909Z JUN 08
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC PRIORITY 7939
INFO RUCNRAQ/IRAQ COLLECTIVE

UNCLAS BAGHDAD 001907

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN IZ
SUBJECT: INFLATION STABLE, BUT PRICE PRESSURES INCREASE AS
IRAQ REBUILDS

REF: BAGHDAD O/I 02/04/08

1. (SBU) Summary: The latest official data show a small
decline in Iraq's consumer prices in May. The annual rate of
core inflation now stands at 14.7 percent, close to its
average level over the past year. Inflationary pressures are
likely to rise in coming months as Iraq's economy runs
against supply constraints in key sectors such as
construction. End summary.

2. (U) According to GOI price data released June 18, the
broad consumer price index (CPI) declined by 1.3 percentage
points in May. The core price index, which excludes the most
volatile elements of the CPI, fell by 1.9 percentage points
for the month. As a result, the latest 12-month broad
measure of inflation is 4.6 percent, nearly a full point
lower than the April figure of 5.5 percent. Annual core
inflation now stands at 14.7 percent, a shade lower than its
average level of 15 percent over the past 12 months.

3. (U) May's marginal drop in the inflation rate comes after
an expected spike in April inflation due to violence-related
marketplace closures in Baghdad and Basra (reftel). The
latest CPI results are further evidence that inflation in
Iraq has stabilized, even though global food prices for food
and energy have increased sharply.

4. (SBU) But the latest Iraqi price data also show growing
upward pressure on prices for non-tradeable goods such as
transportation, housing, and construction materials. The
price index for non-tradeables has increased 12.7 percent
over the past 12 months, almost three times more than the
CPI. At a June 11 conference on budget execution, a full
week before the latest CPI release, Central Bank Deputy
Governor Ahmed Ibraihi said Iraq's economy is approaching the
limits of its productive capacity in some sectors, especially
construction. Ibraihi said the cost of construction was
rising as new projects exhausted supplies of construction
materials. He also noted strains on the capacity of the
relatively small number of competent building firms in Iraq.

5. (SBU) Comment: Rising prices for non-tradeable goods can
be taken as a positive indicator of economic recovery in
Iraq. The GOI's focus on budget execution should boost
aggregate demand, and improved security gives the private
sector more scope for spending on rebuilding and improving
homes and businesses. These two factors probably account for
the tightening of supply conditions in construction. If
Ibraihi is right in saying that Iraq's non-oil economy is
close to supply limits in some sectors, then accelerated GOI
spending could mean even more upward pressure on prices.
With the GOI preparing a supplemental budget emphasizing
capital expenditure, we should expect inflationary pressure
to grow in the coming months. But increasing fiscal stimulus
should also translate into more employment and income, both
of which are central to our counter-insurgency strategy.
CROCKER

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