As the Trump administration begins to revive the maximum pressure campaign, the Iranian economy remains trapped in a relentless cycle of inflation, underscored by the latest Consumer Price Index (CPI) data for March 2025.
With a month-on-month increase of 3.3% and an annual rate of 37.1%, inflation reflects the struggles of millions of Iranians. This latest figure is symptomatic of a longstanding pattern, in which the average annual inflation since the 1979 revolution (approximately 20.8%) exceeds both Iran’s pre-revolutionary inflation rates and regional and global averages.
There are several reasons for this. Chronic government fiscal irresponsibility creates persistent budget deficits. The regime often finances these deficits by borrowing from the Central Bank of Iran, resulting in continuous monetary base expansion. Such unchecked expansion fuels inflationary pressures, eroding purchasing power and destabilizing the economy.
Compounding fiscal challenges, the Central Bank of Iran itself faces severe institutional limitations. Its lack of independence undermines its credibility and effectiveness. The bank operates under outdated regulatory frameworks and weak supervisory systems, constraining its capacity to execute impactful monetary policies.
Current regulatory practices impose stringent quantitative limits on the balance sheets of banks. Although these policies ostensibly curb inflation, they fail in their stated mission while restricting the flow of credit essential for fostering private-sector investment and innovation.
The government also skims from the National Development Fund, which then Islamic Republic founded in 2011 to support long-term development projects. Such misallocation not only diverts resources from critical infrastructure and investment but also signals a willingness to prioritize short-term fiscal relief over sustainable economic growth.
Moreover, politically mandated lending exacerbates inefficiencies within the financial sector. By directing scarce financial resources toward politically favored projects, these mandates disrupt market signals and crowd out productive private-sector investments. Such interference significantly contributes to Iran’s chronic economic stagnation and perpetuates inefficiencies throughout the economy.
External factors amplify these economic vulnerabilities. Iran’s strained international relationships, particularly due to prolonged sanctions and political isolation, restrict foreign currency inflows and economic engagement with the global community. This limitation inevitably results in a volatile exchange rate environment, marked by persistent depreciation of the Iranian rial in unofficial markets. This depreciation inflates import costs dramatically, particularly impacting essential commodities. Food prices, for instance, rose by 4.9% in a single month, disproportionately harming lower-income households and further exacerbating socioeconomic inequalities.
The persistent interplay of high inflation and stagnant economic growth has diminished living standards for a significant portion of the Iranian population. Real incomes have steadily declined, savings erode, and economic opportunities remain limited. Since 1979, Iran’s economic growth rate has lagged behind pre-revolution rates and regional and global benchmarks. Real GDP per capita has yet to surpass its pre-revolutionary peak, illustrating decades of lost potential and economic regression.
Addressing Iran’s inflation crisis requires moving beyond short-term policy fixes. The current policy and political framework – characterized by fiscal indiscipline, weak monetary controls, political interference, and international isolation – perpetuates inflationary pressures while stifling economic development. A paradigm shift is urgently needed.
This shift entails establishing an independent Central Bank with clearly defined and enforceable mandates focused explicitly on controlling inflation and stabilizing the financial system. Robust regulatory reforms within the banking sector are necessary to enhance transparency, accountability, and resilience. Equally critical is a disciplined fiscal policy approach, prioritizing strategic long-term investments over immediate budgetary needs and short-term political considerations.
Additionally, reducing political interference in economic policymaking, particularly in financial markets, would allow market mechanisms to operate efficiently, fostering a conducive environment for private-sector growth and innovation. Iran must also pursue improved international economic relations, reducing geopolitical tensions to stabilize its exchange rate and attract foreign investment, crucial for sustained economic development.
The persistent inflationary crisis in Iran is not merely a symptom but a reflection of deeper structural deficiencies within the current political and economic policy framework. Without structural reforms, inflation will remain an entrenched challenge, undermining Iran’s economic stability and jeopardizing the welfare and prosperity of future generations.
After four decades of theocratic rule, the Islamic Republic has proven incapable of enacting the essential reforms needed to curb inflation and achieve stability at a low rate. Iranians are right to question whether the problem today is simply inflation, or rather a political system that is unable to tackle endemic problems and manage the economy professionally.
Ayatollah Ruhollah Khomeini famously quipped, “You can’t have a revolution over the price of a watermelon.” If today’s stewards of Iran’s economy are not careful, they may prove the Islamic Republic’s founder wrong.
Dr. Saeed Ghasseminejad is a senior advisor for Iran and financial economics at FDD, specializing in Iran’s economy and financial markets, sanctions, and illicit finance. Follow him on LinkedIn and X @SGhasseminejad.