The interplay between exchange rates and inflation in Iran

Al-Monitor | : Over the past few months, Iran’s national currency has regained some of the value it lost in 2018. In fact, compared with its lowest point against the US dollar (146,000 rials in November 2018), the currency has regained about 30% of its value. Nonetheless, the high inflation that was brought about by the collapse of the national currency has not eased yet and still hovers above 40%. This article will identify the impulses that are pushing up inflation despite the relative stability in the foreign exchange market.

In general terms, there is a direct relationship between the devaluation of any national currency and inflation. In the case of Iran, based on the studies carried out by the Statistical Center of Iran, each time the rial’s value is halved, 14.7% gets added to inflation. Using the so-called free market rate of the rial, the mentioned exchange rate in November 2018 (146,000 rials) was 3.5 times that in November 2017 (41,000 rials), justifying an inflation of close to 50%. However, the exchange rate on Sept. 2 (about 115,000 rials) is 27% lower than that of November 2018, but there is no sign of an easing of inflation. In fact, the country’s annual inflation as of June 21 stood at 69.5% compared with annual inflation of 47.5% on March 20, the end of the last Iranian calendar year.

In other words, while the authorities have managed to strengthen the rial, they have failed to contain inflation. The question is what other factors are contributing to this high inflation, which is eating into the purchasing power of Iranian families.

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