By Parsa Ketabi, Director of Strategy and Analytics, CollatEd Lab

Iran’s inflation crisis represents not only a macroeconomic challenge but a direct threat to the SDGs, particularly SDG 1 (no poverty) and SDG 8 (decent work and economic growth). As one of the most persistent inflation episodes in the developing world, with annual rates averaging 40-45% since 2018, these sustained price increases have eroded real incomes, pushed millions into poverty, weakened the private sector, and contributed to repeated social and political unrest.

Iran’s case demonstrates how sanctions, import dependence, institutional fragility, and macroeconomic imbalances interact to create a deep-seated inflationary cycle, one that directly obstructs progress toward poverty reduction, inclusive growth, and resilient economic institutions envisioned in the SDGs. This article analyzes the underlying drivers of chronic inflation, including fiscal dominance, currency depreciation, sanctions constraints, and weak institutional credibility, while evaluating their consequences for sustainable development.

Causes of chronic inflation

A primary driver of Iran’s inflation is fiscal dominance, where persistent government deficits are financed by monetary expansion from the Central Bank of Iran (CBI). Sanctions reduce oil revenues and limit access to foreign financing, increasing the likelihood that fiscal shortfalls are covered through central bank advances. The International Monetary Fund (IMF) identifies money growth linked to deficits as the dominant long-run driver of inflation. This dynamic forms a reinforcing chain in which deficits lead to monetary expansion, which then depreciates the currency, raises import prices, and ultimately increases inflation expectations.

Exchange rate depreciation further intensifies inflation through pass-through effects. Recurrent sanctions weaken Iran’s foreign exchange reserves and limit oil exports, causing the rial to depreciate sharply. In 2025, Reuters reported that the rial fell to a record 1,039,000 per US dollar on the parallel market. Because Iran relies heavily on imported food, medicine, and industrial inputs, depreciation quickly raises domestic prices. Firms adjust prices pre-emptively in anticipation of further currency weakness, reinforcing inflation expectations and creating a feedback loop between the exchange rate and the consumer price index.

Additionally, weak monetary policy transmission and limited central bank independence undermine price stability. Although the CBI introduced open market operations in 2020, these tools remain constrained by fiscal pressures and limited institutional credibility. Inflation expectations remain unanchored, leading households to spend quickly and firms to raise prices in anticipation of future inflation. Structural factors, including shallow financial markets, import dependence, energy inefficiencies, and sanctions-related supply bottlenecks, reinforce these economic pressures and contribute to cyclical price surges.

Welfare losses and policy constraints in Iran’s inflation environment

The most immediate impact of inflation is the erosion of household purchasing power. Real wages have not kept pace with rising prices, forcing families to reduce consumption and shift spending to basic necessities. The World Bank estimates that 35-40% of Iranians now live below the poverty line, while over half of households briefly fell below poverty thresholds during the 2022 inflation peak. Because lower-income households spend a larger share of their income on food, inflation acts as a regressive tax that disproportionately harms the poor.

In particular, Iran’s inflation crisis undermines progress toward SDG target 1.4, which calls for ensuring equal access to economic resources and financial services. Persistently high inflation acts as a regressive tax on low-income households, eroding purchasing power and increasing poverty, conditions documented by recent World Bank data showing that 35-40% of Iranians now live below the poverty line.

The Iranian government has introduced several measures to address inflation, though with limited success. The introduction of open market operations in 2020 marked a step toward modernizing monetary policy, but these tools cannot be effective without restricting deficit monetization. The 2022 exchange rate unification eliminated a major source of corruption but created a temporary inflation surge that damaged public trust. Without credible fiscal and institutional reforms, these measures cannot anchor expectations or achieve durable stabilization.

Viable solutions

A realistic stabilization strategy requires coordinated short-, medium-, and long-term reforms. In the short run, protecting vulnerable households through targeted cash transfers and digital vouchers is essential to offset the effects of subsidy reforms and exchange rate adjustments. Transparent foreign exchange auctions can reduce arbitrage and help stabilize currency expectations.

Furthermore, fiscal consolidation is crucial. This includes broadening the tax base, strengthening VAT administration, improving expenditure efficiency, and limiting central bank deficit financing. Establishing legal foundations for greater central bank operational independence and adopting a clear inflation target, such as reducing inflation below 20% within three years, would improve credibility.

Ultimately, structural reforms focused on diversifying the economy, improving state-owned enterprise governance, and strengthening domestic production capacity can reduce susceptibility to external shocks. Case studies from Türkiye and Brazil show that coordinated fiscal, monetary, and institutional reforms can reduce inflation from above 40% to single digits when implemented credibly and consistently.

Implementing the outlined policy priorities, including fiscal discipline, an independent central bank, targeted cash transfer programs, and exchange rate stabilization, would significantly reduce inflation volatility and protect real incomes. These reforms can strengthen social protection systems and improve financial stability, aligning Iran’s macroeconomic strategy with global development priorities under SDG 1.

Inflation, inequality, and institutional strain: Implications for Iran’s SDG pathway

A central question for understanding Iran’s economy – and its progress toward the SDGs – is whether a weaker currency drives higher prices. When researchers look at the data over time, using simple statistical models that track how changes in the exchange rate correspond to changes in inflation, the pattern is clear: when the rial depreciates, domestic prices rise quickly. This is known as exchange rate pass-through, and in Iran it is high because the country depends heavily on imported food, medicine, and industrial goods. IMF evidence consistently shows that price spikes closely follow episodes of currency depreciation.

Examining inflation by major spending categories makes the human impact visible. Food accounts for roughly a quarter of household budgets and housing for about a third. When food inflation exceeds 50% and housing inflation approaches 35%, these two essentials alone explain more than half of overall inflation. Because low-income households spend the largest share of their income on these necessities, price increases hit them hardest. This dynamic directly undermines SDG 1 and widens existing inequalities across gender, age, and region.

The picture becomes even more concerning when considering real income – what people can actually afford. Even if wages increase nominally, they lose value when prices rise faster. For example, a 20% wage increase alongside 45% inflation results in a real income loss of about 17%. Indicators such as the consumer price index and Gross Domestic Product (GDP) deflator both show that inflation is economy-wide, affecting families’ purchasing power, firms’ investment decisions, and the country’s long-term growth trajectory.

Inflation also carries policy implications. When government deficits are financed by expanding the money supply, domestic demand rises, fueling more inflation. At the same time, depreciation raises the cost of imports, creating cost-push inflation. Limited central bank independence makes it difficult to respond effectively, increasing uncertainty for households and businesses.

These economic pressures intersect with broader social and political issues in Iran. Rising prices and falling real incomes intensify household insecurity, widen gendered and class-based vulnerabilities, and erode public trust in state institutions. For example, women – already facing labor market constraints, unpaid care burdens, and legal discrimination – experience deeper declines in economic autonomy during inflationary periods. Youth, rural communities, and ethnic minorities also bear disproportionate hardship. These intersecting inequalities have played a visible role in public frustration and political dissent, from protests over rising food prices to broader calls for accountability and transparency.

Persistent inflation therefore becomes more than an economic challenge. It strains state legitimacy, narrows space for peaceful civic engagement, and highlights weaknesses in governance structures. This undermines SDG 16 (peace, justice and strong institutions), which emphasizes transparency, accountability, and inclusive institutions as foundations for development.

Altogether, the statistical evidence reveals that inflation in Iran is not merely a macroeconomic trend – it is a barrier to poverty reduction, gender equality, social stability, and the creation of peaceful and effective institutions. Restoring price stability is thus essential not only for achieving SDG 1 and SDG 8, but also for advancing SDG 5 (gender equality) and SDG 16, making it a core development priority for the Middle East region.