The Iranian year 1404 (March 2025–March 2026) will likely be remembered as a turning point in Iran’s economic history. Inflation has become the country’s most urgent economic problem, and no sustainable recovery in growth, investment or living standards is possible without confronting it.
Warnings from economists about accelerating inflation should not be treated as attempts to frighten the public. They are part of their professional responsibility. Policymakers should welcome such warnings, even when they are uncomfortable. Silence would be far more dangerous.
Iran has lived with high inflation for decades, but the current situation is different. In some provinces, inflation has reached triple-digit levels, while the gap between inflation experienced by lower- and higher-income households has widened sharply. High inflation destroys purchasing power, increases inequality and makes economic planning increasingly difficult.
There is also a misconception about the causes of current inflation. The sharp rise in the exchange rate is often presented as the main cause. Currency depreciation quickly feeds into prices. Businesses adjust prices, households change expectations, and imported goods become more expensive. But correlation does not necessarily establish causation.
The exchange rate is itself a price. When authorities keep it below a level justified by economic fundamentals, the eventual correction should not automatically be regarded as the ultimate cause of inflation. It can instead be an early visible symptom of deeper pressures.
The more fundamental problem is the deteriorating financial position of the public sector. Sanctions, weaker economic activity and higher transaction costs have reduced government revenues, while many expenditures have remained high or increased. Government income has fallen while spending pressures have intensified.
This widening fiscal imbalance has consequences. If the government and broader public sector accumulate obligations without sufficient real revenues from taxation or oil exports, the value of those obligations must eventually fall. Inflation is one mechanism through which that adjustment occurs.
This does not mean controlling inflation is easy. Fiscal reform is difficult, especially when the state struggles to reduce ineffective spending. Nor does it mean supply shocks are irrelevant. War-related disruptions and shortages can add to price pressures. But supply shocks alone cannot adequately explain persistent inflation approaching 90 percent or, in some places, exceeding 100 percent.
Iran has faced moments when hyperinflation seemed possible, including in 1397 (March 2018–March 2019), 1399 (March 2020–March 2021) and 1401 (March 2022–March 2023). Strong professional expertise inside the state helped prevent those episodes from turning into full-scale hyperinflation. That human capital remains one of Iran’s most valuable economic assets.
The inflation trap emerges when fiscal weakness, rising prices and falling confidence reinforce one another. Higher prices increase government spending, while weaker economic activity can reduce real revenues. The resulting fiscal pressure can lead to greater borrowing and monetary expansion, creating another round of inflation.
Blaming the Economy Ministry, the central bank, exchange-rate policy or the removal of preferential foreign currency may be politically attractive, but it does not solve the problem. The central issue is the fiscal imbalance of the public sector.
Recent central-bank measures may slow inflation, and an easing of sanctions or war-related pressures could temporarily improve public finances. But these would only provide breathing space. The long-term solution requires a credible fiscal framework, tighter control of public spending, stronger revenues and monetary policies consistent with price stability.
Iran still has an opportunity to avoid the worst outcome. The rial retains important monetary functions, public confidence has not completely collapsed, and capable economists remain inside the policymaking system. But these advantages cannot be taken for granted.
The lesson of 1404 is clear: inflation should not be treated as a secondary consequence of other problems. It is the central economic crisis. The longer fiscal imbalances remain unresolved, the greater the risk that Iran will become trapped in a cycle of rising prices, weakening confidence and deeper financial instability. Escaping that trap requires confronting the fiscal roots of inflation before the cost becomes even higher.
