VZCZCXRO1624
RR RUEHBC RUEHDA RUEHDE RUEHDH RUEHIHL RUEHKUK
DE RUEHGB #2301/01 2381429
ZNR UUUUU ZZH
R 261429Z AUG 09
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC 4463
INFO RUCNRAQ/IRAQ COLLECTIVE
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 03 BAGHDAD 002301 
 
SENSITIVE 
 
SIPDIS 
 
AIDAC 
 
STATE FOR NEA/I/ECON AND EEB/IFD/OMA 
 
E.O.12958: N/A 
TAGS: ECON EFIN EAID IZ
SUBJECT: SECURITY ISSUES, NOT RAMADAN, CORRELATES WITH 
         INFLATION IN IRAQ 
 
¶1. (SBU) SUMMARY: In Iraq, as in other Middle Eastern countries, 
economic activity increases during Ramadan as families buy more 
traditional foodstuffs and gifts for Iftar dinners.  Despite 
this increased demand for goods (and reports of price-gouging), 
our analysis of Iraq's Consumer Price Index (CPI) from 2003-2008 
shows no systematic increase in inflation during the Ramadan 
period.  Instead, price inflation appears strongly correlated 
with security concerns.  END SUMMARY. 
 
ANECDOTAL SIGNS THAT PRICES RISE DURING RAMADAN 
--------------------------------------------- -- 
 
 
¶2. (U) Embassy Baghdad's local staff and many of our Iraqi 
counterparts complain that prices of goods families typically 
buy for Ramadan - meat, candy, tea, lentils, and small toys for 
children - rise with the approach of the holy Islamic period. 
Religious leaders have used their sermons to denounce the 
attempt of some "unscrupulous" merchants to "exploit this 
month in order to crush the poor by increasing prices."  Press 
editorials have accused Trade Ministry officials of "colluding 
with the merchants to allow them to control prices."  This 
alleged seasonal inflation is a popular topic of conversation 
in Iraq, but recent empirical evidence does not support the 
accusations. 
 
THE CPI DOES NOT SHOW SEASONAL INFLATION 
---------------------------------------- 
 
¶3. (U) The GOI Central Office for Statistics and Information 
Technology (COSIT) publishes the monthly Consumer Price Index 
(CPI) for Iraq.  Using this data (available at 
http://cosit.gov.iq/english), ECON analyzed the annualized 
average month-on-month core inflation during Ramadan and the 
rest of the year for each of the past six years (2003-2008). 
(NOTE: We specifically used just "core" inflation, which omits 
globally volatile fuel, energy, transportation, and 
communication prices to better isolate the local in-country 
effects of Ramadan on prices, especially food prices.  END 
NOTE.)  Our comparison shows that there appears to be no 
systematic increase in inflation during the Ramadan period. 
 
CORE INFLATION (AVERAGE ANNUALIZED % Month-On-Month) 
 
Year   NOT Ramadan  Ramadan  Difference 
 
2003      10.4        4.6      -5.8 
2004       2.8        4.0       1.2 
2005       2.2        3.2       1.0 
2006       2.3        1.4      -0.9 
2007       1.0        1.5       0.5 
2008       0.9        2.9       2.0 
 
¶4. (U) The chart above shows that in two of the past six years 
(2003 and 2006), prices actually decreased during Ramadan.  In 
2004, 2005, and 2007, we believe that the small percentage point 
differences of 1.2, 1.0, 0.5 are statistically insignificant. 
The difference of 2.0 percentage points in 2008 is likely 
attributable to the significant increases in global food prices, 
and should not be interpreted as indicative of seasonal Ramadan 
inflation alone.  (In September 2008, Iraq food prices increased 
6.1 percent month-on-month and 14 percent year-on-year.  Global 
food prices, according to the United Nations, hit an all-time 
high in June 2008 and did not recover to pre-crisis levels until 
the beginning of 2009.) 
 
PERHAPS THE CPI IS FLAWED 
------------------------- 
 
¶5. (U) Even if the historical CPI data do not reflect a seasonal 
uptick in prices during Ramadan, why do more than 25 million 
Iraqi consumers believe that they are paying more for their 
Ramadan purchases?  If consumers are indeed paying higher prices, 
one possible explanation is that COSIT uses a flawed basket of 
goods to calculate the inflation rate.  COSIT's basket of goods 
Qgoods to calculate the inflation rate.  COSIT's basket of goods 
is based on a 1993 household survey that may no longer reflect 
the consumer behavior of the typical Iraqi household.  For 
instance, since 1993, Iraqis have started spending significant 
portions of their income on televisions and mobile phones. 
Also, many families have migrated from farms to the cities and 
no longer grow food for their own consumption.  COSIT conducted 
a comprehensive Iraq Household Socio-Economic Survey in 2007 
from which it intends to develop a new, updated CPI basket. 
 
FOOD DISTRIBUTION MEANS FEWER GOODS BOUGHT 
 
BAGHDAD 00002301  002 OF 003 
 
 
------------------------------------------ 
 
¶6. (U) Another complication is that 70 percent of Iraqi families 
receive monthly food baskets -- including flour, sugar, rice, 
cooking oil, and soap -- through the GOI's Public Distribution 
System (PDS).  (In past years, the Ramadan basket also included 
tea and lentils, key staples during this period.)  The fact that 
consumers receive many of these goods for free mitigates the 
effect of traditional supply and demand and the (alleged) 
price-gouging found elsewhere in the Middle East during Ramadan. 
In an effort control budget expenditures and pressure from the 
International Monetary Fund, the GOI may look to reduce the PDS 
over the coming year.  If so, we may see more (expected) 
inflation during the Ramadan season. 
 
SECURITY HAS STRONGEST EFFECT ON PRICES 
--------------------------------------- 
 
¶7. (U) Our analysis indicates that security concerns in Iraq have 
a very strong effect on overall prices.  Hoarding of goods, 
shortages due to transportation difficulties, citizens' fear 
of attack as they walk in the streets, and anxiety over bombs 
in market areas all affect consumer behavior in ways that 
ultimately lead to higher prices.  Because security concerns 
may be impossible to quantify, a good proxy is mortality, measured 
by the average number of Iraqi violent civilian deaths per day. 
As it is a proxy, mortality can be seen as a strong correlating 
variable in the analysis rather than a direct causative factor on 
price inflation. 
 
AVERAGE NUMBER OF IRAQI CIVILIAN DEATHS/DAY 
 
Year   NOT Ramadan  Ramadan  Difference 
 
2003       32         16       -17 
2004       21         48        27 
2005       34         34         0 
2006       69         88        19 
2007       64         38       -25 
2008       2          17        -5 
 
¶8. (U) According to this data from the Iraq Body Count website 
(http://www.iraqbodycount.org) on Iraqi civilian deaths, one 
cannot immediately say that Iraq is either more or less "secure" 
during Ramadan.  [NOTE: While not GOI official information, 
IraqBodyCount.org is widely used as the source of data for 
civilian casualties due to its consistent reporting and 
documentation.  END 
 
(NOTE.)  In 2003, 2007, and 2008, average daily deaths 
decreased during Ramadan, while in 2004 and 2006 they 
increased substantially during the holiday period.  But, 
when one analyzes headline inflation over time alongside 
our mortality proxy for insecurity, the results are surprisingly 
strong.  [NOTE: We use "headline" inflation here because it 
includes the volatile sectors of fuel, energy, transportation, 
and communication, which are particularly affected by acts of 
terrorism.  END NOTE.) 
 
¶9. (U) Since mid-2004, the graphs for Iraqi civilian deaths and 
monthly year-on-year percentage changes in headline inflation 
over time track each other closely.  [NOTE: The graphs of our 
analysis are available on Embassy Baghdad's intranet homepage 
at: http://baghdad.state.gov/ sites/ECON/Inflation%20Graphs/ 
Forms/AllItems.aspx  END NOTE.]  Of particular interest is the 
period since July and August 2006, when violent deaths and 
inflation peaked, respectively.  We have calculated a .88 
correlation (very strong) between the two since their decline 
from that peak.  If a one-month lag period is factored in 
(assuming that one month's insecurity will not show up until 
next month's price index), the correlation is even higher: .93. 
Such a high correlation suggests that security concerns - as 
measured by violent civilian deaths - in one month appears to 
Qmeasured by violent civilian deaths - in one month appears to 
drive up prices over the next month.  Also, according to our 
analysis, when civilian deaths decline, inflation generally 
decreases shortly thereafter. 
 
COMMENT 
------- 
 
¶10. (SBU) As the CPI model gets updated, the GOI cuts its 
food distribution to all but the truly poor, and the security 
situation improves over time, we may see empirical evidence of 
price inflation during Ramadan as in other Middle Eastern 
countries.   Right now, however, security concerns (or 
 
BAGHDAD 00002301  003 OF 003 
 
 
insecurity proxied by violent civilian deaths) is a statistically 
stronger factor than Ramadan as an indicator of price inflation 
overall.  Given the tragic August 19 bombings in Baghdad that 
killed more than 100 people, we would expect inflation during 
Ramadan 2009 to increase due to fear affecting consumer 
behavior. 
 
FORD