Iran's Rial Takes a Dive and Inflation Soars

The Grim Reaper has taken his scythe to the Iranian rial (see chart below). The Islamic Republic of Iran remains in the ever-tightening grip of an economic death spiral. The economy is ever-vulnerable because of problems created by the last Shah, and added to massively by the theocratic regime. Indeed, the economy is more vulnerable to both internal and external shocks than ever. That vulnerability will become more apparent in the face of President Trump’s tearing up of the Joint Comprehensive Plan of Action (JCPOA), and the laying on of more primary and secondary sanctions against Iran. How fast the death spiral will spin is anyone’s guess.

With the collapse of the rial, Iran's inflation has surged. The most important price in an economy is the exchange rate between the local currency and the world’s reserve currency — the U.S. dollar.  In Iran, the IRR/USD exchange rate, represents the most important price. By using active and available black-market (read: free market) data for the Iranian rial, I have transformed the black-market exchange rate into accurate measurements of country wide inflation. The economic principle of Purchasing Power Parity (PPP) allows for this reliable transformation, so long as the annual inflation rate exceeds 25%.

The chart below shows how Iran’s implied annual inflation rate has surged to an annual rate of 74.8% with the collapse of the rial’s value against the U.S. dollar.

So, what is to come of Iran’s economic death spiral? It can be summed up in one word: misery.

To get a sense of how miserable Iran is, we can look to Hanke’s Annual Misery Index. Back in February when the index was calculated, Iran ranked the 11th most miserable country, out of the 98 countries in the index. Using today’s surging inflation rate of 74.8% in our calculation of misery, Iran would a rank 3rd, just behind Venezuela and Syria.

Another useful dimension for checking Iran’s temperature on a daily (if not minute-by-minute) basis is the black-market premium. The black-market premium (BMP) is calculated by using the following formula:

A 51.6% black-market premium indicates that Iranians were willing to pay 51.6% more for U.S. dollars in the black-market than if they were lucky enough (read: privileged enough) to obtain them at the official exchange rate.

For a fuller picture of the black-market premium, I have plotted it while President Hassan Rouhani has been in office. As we can see, the recent spikes have been associated with President Trump’s attacks on and subsequent cancellation of the JCPOA nuclear deal, as well as increased rhetorical and real attacks on Iran via the U.S. Treasury Department's sanctions war machine.


To follow how Iranians perceive both the internal and foreign zigs and zags of the state of affairs they face, there is no better, up to the minute, measure than the IRR/USD black-market premium. In short, instead of obsessing over each and every utterance of the so-called experts on Iran, observers should be following the black-market premium.

Authored by Steve H. Hanke of the Johns Hopkins University

Past Blogs

Venezuela's Episode of Hyperinflation Reaches New "Highs" - Prices Double Every 17.5 Days

May 12, 2018

The most important price in an economy is the exchange rate between the local currency and the world’s reserve currency — the U.S. dollar. As long as there is an active black-market (read: free market) for currency and the data are available, changes in the black-market exchange rate can be reliably transformed into accurate estimates of countrywide inflation rates—if the annual inflation rates exceed 25%.

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