Iran's Rial Hits All-Time Low and Inflation Soars to 147%

Authored by Steve H. Hanke of the Johns Hopkins University. Follow him on Twitter @Steve_Hanke.

The Iranian rial just hit an all-time low (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 incompetence and shenanigans of the theocratic regime. Indeed, the economy is more vulnerable to both internal and external shocks than ever. 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.

The chart below shows how Iran’s implied annual inflation rate has surged to an annual rate of 147% with the collapse of the rial’s value against the U.S. dollar. That’s a whopping 137.3% points higher than the official rate of 9.7%. And for Iranians, these contrasting figures bring back a line from the Marx Bros. “Who are you going to believe, me or your lying eyes?”

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 111.71% black-market premium indicates that Iranians were willing to pay 111.71% 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.