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