War or government failure? Record inflation fuels political battle in Iran

Average annual inflation has climbed to a record 62%, while year-on-year inflation has surged to 82%, rapidly eroding household purchasing power.

Food prices remain the principal driver of overall inflation, with annual food inflation staying in triple digits for a sixth consecutive month. In July, food inflation reached 134% nationwide and 140% in rural areas. More than two-thirds of the food items monitored by the statistical agency now exceed what economists describe as crisis-level inflation.

Prices have risen sharply across other sectors as well. Household appliances are estimated to cost 114% more than a year ago, while transportation costs have climbed 103%. Economists warn that a possible gasoline price increase could push food inflation even higher by raising distribution and delivery costs.

War or government policy?

Critics of President Masoud Pezeshkian’s government, many of whom also oppose an agreement with the United States, argue that the inflation surge is rooted entirely in domestic economic policy rather than the recent conflict.

Hojjat Abdolmaleki, labor minister under former president Ebrahim Raisi, dismissed any connection between the war and rising prices.

“The war has had no effect whatsoever on inflation. Inflation has risen steadily throughout the Pezeshkian Administration, and the war’s contribution to these price increases is zero,” he said.

“Virtually all of this inflation is the direct result of misguided policies and government incompetence. Even without the war, the situation would have been the same, perhaps even worse.”

Other economists reject that assessment, arguing that both domestic policy and the conflict have driven prices higher.

Mohammad Sadegh-Alhosseini told the Iranian Students News Agency (ISNA) that domestic policies could account for inflation of between 30% and 50%, but that the increase beyond that range was linked to international tensions and the war.

Mojtaba Yousefi, a member of parliament, also said it was inaccurate to claim that the war had no effect on prices. “But it is equally wrong to attribute all inflation to the war,” he said.

Economists also caution that even an agreement between Tehran and Washington, potentially unlocking frozen assets, easing sanctions, increasing oil revenue and reducing inflation expectations, would be unlikely to bring prices down quickly.

They say chronic budget deficits, entrenched corruption and structural inefficiencies are so deeply embedded that reversing them could take years.

Even if the fighting ends, the cost of rebuilding damaged infrastructure and industry would continue to strain public finances. Conservative politician Mohammad-Reza Bahonar recently estimated reconstruction costs at $200 billion.

Purchasing power continues to collapse

The inflation surge has increasingly affected ordinary Iranians. According to a report by the Iranian Labour News Agency (ILNA), during recent months even basic staples such as chicken, eggs and bread have become unaffordable for many working-class households. Bread prices alone have risen by between 100% and 140% on average.

Official data show that prices of at least eight food items have more than doubled over the past year. Cooking oil has risen 261%, while meat prices have increased 145%.

By comparison, ILNA wrote, the minimum wage has increased by only 60%, while salaries for civil servants, pensioners, nurses and teachers have risen by between 20% and 43%, averaging roughly 30%. As a result, many of these households no longer fit the conventional definition of the middle class, the report argued.

Government food vouchers introduced in January have also lost much of their purchasing power, as authorities have left their value unchanged despite soaring food prices.

Ahmad, a retired civil servant in Tehran, said the vouchers initially allowed him to buy around ten food items. "Now I can only afford three or four."

Social media has also reflected the growing financial strain. Users report increasing numbers of people selling, or even renting out, personal belongings such as electronic devices to cover daily expenses.

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  Economic crisis drives Iranians to sell hair, rent laptops

Journalist Azadeh Mokhtari wrote: "When advertisements for selling hair, or even renting laptops for online classes, become more common, it means the middle class is being worn away, and the lower-income class is being pushed out of the economy."

Misery index reaches new peak

The deteriorating economic environment is also reflected in Iran's misery index, the combined rate of annual inflation and unemployment.

With annual inflation at 62% and unemployment at 9.1% in the quarter ending in June, the misery index climbed to a record 71.1%, up from 64.2% in the previous quarter. The index stood at 56.6% during the same period in 2021.

The economic burden is not evenly distributed across the country. Several provinces have recorded misery index readings above 100%, with Lorestan registering the highest level at 121.5%.

Economists say the figures reflect not only declining purchasing power and weaker job security but also rising uncertainty that makes long-term financial planning increasingly difficult for households.

"Pray for me. Mother, I'm dying," he said, pleading with his loved ones to look after his sons, especially Habib.

Hayatullah was among 14 Afghan migrants who died attempting to reach Iran, Afghan officials said, weeks after the vehicle carrying them broke down and they continued the journey on foot.

Why would anyone risk one of the world's deadliest migration routes to reach Iran?

The country is grappling with economic crisis and widespread repression. It has carried out one of the region's largest deportation campaigns against Afghan migrants and offers little prospect of permanent legal status.

"It's not about a choice between safety and danger," Yasin Samim, an Afghan governance and development analyst, told Iran International. "It's about what type of danger."

Samim said conditions inside Afghanistan had become so severe that many people continued to flee despite knowing the risks awaiting them in Iran.

"The fact that they come to Iran shows the severity of the situation and conditions in Afghanistan," he said. "The reasons they leave Afghanistan have not changed."

With the Taliban's return to power, legal pathways to Iran have become increasingly restricted, forcing many low-income Afghans into the hands of smugglers.

"Granting a visa has become a deal of the black market," Samim said, adding that visas can reportedly cost between $1,000 and $1,200—far beyond the reach of many Afghan families.

"The combination of poverty, unemployment and repression leaves people with no alternative," he said. "That is the only choice they have."

Those who cannot afford legal routes often attempt the crossing through Nimruz, one of the main transit corridors into Iran for irregular migration.

The route has become synonymous with one of the deadliest migration paths into the country. Migrants cross vast stretches of unforgiving desert where temperatures regularly exceed 45°C (113°F).

If smugglers abandon them or their vehicle breaks down—as happened in this case—survival quickly becomes a race against dehydration. Many die before reaching help. Others face robbery, exploitation or detention before ever reaching Iran.

Iran has long hosted one of the world's largest Afghan populations despite offering few permanent rights to those who settle there. Before its mass deportation campaign in 2025, an estimated four million Afghans lived in the country, including registered refugees, documented migrants and undocumented workers.

Yet many remained in legal limbo despite spending years—or even decades—in Iran. Children born in Iran to Afghan parents are not automatically granted Iranian citizenship, and for most there is no realistic pathway to becoming Iranian citizens.

"Iran has shut down legal pathways for Afghans in recent years," Omid Memarian, senior Iran analyst at DAWN told Iran International. "Because so many pathways have been blocked, they have to take much riskier ways to be smuggled from Afghanistan to Iran.”

That means the chance of being exploited is higher, Memarian added, and their rights are more likely to be violated.

Tighter restrictions appear to have little bearing on Afghans' calculations. It has only pushed them onto more perilous routes across deserts such as Nimruz, where extreme heat could quickly turn a journey into a death sentence.

"For them, the question is not, 'Let's go to the best ideal country.' The question is, 'Let us get out of here.' ... It's about survival," Memarian told Iran International.

Iran International reached out to the United Nations High Commissioner for Refugees (UNHCR) for comment.

A spokesperson referred us to a statement issued last month warning that Afghanistan is ill-equipped to absorb the growing number of returnees.

The agency said more than six million Afghans have returned since 2023, while nearly half the country's population already depends on humanitarian aid.

It called for returns to be safe, voluntary and dignified, warning that mass deportations risk deepening one of the world's worst humanitarian crises.

In late July, the governor of Iran's central bank, Abdolnaser Hemmati, announced a victory: monthly inflation, he said, had been nearly halved in a single month — from 7.4 percent in the month ending June 21 to 3.6 percent in the month ending July 22 — thanks to “measures and tools at the bank’s disposal.” He did not name a single tool.

Numbers like these need translation. Monthly inflation is a standard statistic everywhere, but in Iran it is the number people live by: when prices move this fast, the month-to-month change is what a household actually feels at the store.

By the central bank’s own report, prices are now about 84 percent higher than a year ago. Even the “victory” month is nothing to celebrate: 3.6 percent, repeated for 12 months, compounds to an annual rate above 50 percent.

What the announcement omitted is that for almost exactly that statistical month, Iranians could not use their banks.

On June 13, electronic services failed at four major state banks. The state-linked company that runs their infrastructure claimed a cyberattack and said it had taken backup systems offline as a precaution, while official promises of a fix kept slipping.

On June 23, a second wave hit eight banks. Card readers went dead and banking apps would not load in a country where everyday life runs on debit cards, leaving millions of people unable to reach their own money for weeks.

Bank Melli, one of Iran’s largest banks, later waived late-payment penalties for a precisely defined window: June 13 to July 14. That amounted to a full month of disruption, by the bank’s own admission.

The same month piled on more. The state semi-shut the country for about a week in early July for Ali Khamenei’s funeral ceremonies. In the second week of July, fighting with the United States resumed and the naval blockade of Iran’s ports returned.

Extreme heat and a failing power grid then closed offices and banks in several provinces in the final week. In a month like that, a great many purchases simply never happened — not because prices had calmed, but because buying was impossible. A purchase that cannot happen puts no pressure on prices.

The central bank’s own report records the tell. Food inflation — groceries, the most card-dependent of all purchases — collapsed from 8.7 percent to 1.8 percent.

The dials the governor did not mention moved the other way: prices versus a year earlier accelerated, and the 12-month average rose from 57.7 to 61.4 percent.

Street prices told the same story. The announced consumer price of a carton of eggs rose about 20 percent between late May and mid-July, roughly double the official inflation rate for the same stretch.

Halving an inflation rate ordinarily requires tight money sustained over a long period. In Iran’s case, no tightening of any kind occurred: deposit rates did not move until late July, liquidity kept growing rapidly, and there was no sign of fiscal restraint.

A central bank that possessed a painless one-month cure would also need to explain why it kept that cure in the drawer while annual inflation has averaged above 40 percent over the past five years.

There is an old warning in economics, associated with the British economist Charles Goodhart, that when a measure becomes a target, it ceases to be a good measure. Iran’s monthly inflation rate has now completed that journey.

In July, it stopped measuring price pressure in the Iranian economy and began measuring something else: the downtime of the country’s payment system.

A government can manage inflation, or it can manage the inflation statistic. Only one of these shows up at the grocery store.

In April, an American F-15 fighter jet was shot down over southwestern Iran, likely by a Chinese-made shoulder-fired missile. Both crew members ejected and were rescued, one of them after two days on the ground in the foothills of the Zagros Mountains.

The loss was historic. No American fighter had been downed by enemy fire in decades.

Iran has reportedly been sourcing these weapons from China, through schemes Washington has been watching for months.

In early May the Treasury Department put one scheme on the public record, sanctioning a network of middlemen arming the Islamic Republic with Chinese weapons, including shoulder-fired missiles. Days later, President Trump traveled to Beijing for a state visit with Xi Jinping.

In late July, he told the public that Xi had personally assured him China would not, “under any circumstances,” sell weapons to the Islamic Republic.

Five days later Reuters reported that a Chinese company had agreed to supply the Islamic Republic with 300 to 400 shoulder-fired air defense missile systems in a deal worth $60 to $70 million.

While the two leaders met and traded assurances, the Islamic Republic appears to have kept buying, likely working several supply channels at once.

The reported deal could help the Islamic Republic close a dangerous gap at exactly the wrong time for Washington. During the 12-day war in June 2025, Israeli aircraft operated over Iran almost at will after the opening strikes severely damaged the country’s air-defense network. The United States later joined the campaign with strikes on Iran’s nuclear facilities.

A shoulder-fired missile will lose most encounters with a modern fighter, but it only has to win occasionally. After the April shootdown, every pilot flying low over Iran has to assume there may be a missile team underneath him, so planners may fly higher or less often, and spend more time and aircraft clearing threats before anyone goes in.

It’s the same effect CIA-supplied Stinger missiles had during the Soviet–Afghan War after 1986, when they made low-altitude flying dangerous enough to force Soviet pilots to change their tactics.

We’ve already seen the effect of this strategy at sea, where the Islamic Republic’s missiles, mines and drones along the Strait of Hormuz have sunk few ships yet collapsed traffic and multiplied insurance costs.

These missiles reach only a few thousand meters into the sky. They cannot touch high-flying aircraft or ballistic missiles, and they will not rebuild the air defense shield the Islamic Republic lost. What they will do is make low-altitude missions—including helicopter operations and some strike and support flights—riskier and more expensive

Since the ceasefire, Basij and Revolutionary Guard units around the country have been training with shoulder-fired air-defense weapons. They also won’t all stay in Iran.

Iran has previously been accused of supplying MANPADS to allied armed groups like the Houthis and Hezbollah, raising the risk that some systems could leave the country. Shoulder-fired missiles have also posed a longstanding threat to civilian aviation worldwide.

China’s answer to all of this has been denial. When NBC reported that a Chinese missile likely downed the F-15, Beijing dismissed the reporting as a groundless smear. When Reuters described the new deal in July, the foreign ministry called it “completely groundless” as well.

Reuters reports that the contract runs through a company registered in Hong Kong and that the missiles are set to travel from Urumqi in western China through Pakistan into Iran. Pakistan, which brokered April’s ceasefire, denies any role.

Strategic credulity?

Trump has taken America’s adversaries at their word before. Xi told him China would not arm the Islamic Republic, and he repeated the assurance to the public as though it settled the matter.

When Volodymyr Zelensky said in late July that Russia was feeding the Islamic Republic satellite imagery to help target American bases, Trump said he would ask Putin about it. He says what he says with a purpose.

Repeating Xi’s promise keeps the relationship warm and the Washington visit on track, while his own government sanctions the middlemen and works to stop the shipments. The message serves diplomacy and the action deals with the missiles, and he sees no contradiction in running both at once.

The Islamic Republic never puts all its eggs in one basket. Washington got ahead of one channel, and we are starting to see the others. The network Treasury sanctioned in May ran through Hong Kong, Belarus and Dubai, while the reported July deal runs through a different Hong Kong company and a different route, through Pakistan.

As the reported Chinese deals advanced, Tehran also signed an agreement with Russia, as reported by the Financial Times, for roughly half a billion euros’ worth of Verba shoulder-fired missiles.

Every route runs at once, and the Islamic Republic plans on losing a few. The first Chinese shipment is said to be weeks away. It should be one that the Islamic Republic loses.

After Iran fired several ballistic missiles toward a US military base in Jordan early Wednesday Tehran time, US President Donald Trump vowed to hit back hard.

Hours later, the naval arm of Iran's Islamic Revolutionary Guard Corps (IRGC) announced it had struck and detained three "offending" oil tankers in the Strait of Hormuz.

Several analysts said the combination of the Jordan strike and Tehran's actions in the Strait of Hormuz suggested Iran was no longer content to react to US pressure but was instead trying to seize the initiative and reshape the course of the confrontation.

Political analyst Ruhollah Rahimpour told Iran International the overnight missile launches and the Hormuz operation reflected a deliberate strategy of escalation.

"I think last night's missile operations in Jordan and the Strait of Hormuz are part of the Islamic Republic's strategy of escalating tensions and trying to accelerate a full-scale war with the United States and Israel, forcing them into conflict before they are fully prepared," he said.

‘Ready for broader conflict’

Despite the latest escalation, Trump insisted talks with Tehran would continue. A day earlier, he told Fox News negotiations were progressing well but warned that if no agreement was reached, Washington could strike Iran's underground facilities, bridges and power plants.

The strike also marked the first time Iran had targeted a US military installation without first coming under direct US attack, although Tehran has repeatedly argued that the continuing US maritime blockade itself constitutes an act of war.

Political analyst Shahir Shahid Saless argued Tehran appears to have concluded that maintaining the current status quo is no longer strategically sustainable while Iran remains under severe economic pressure and a maritime blockade.

According to Shahid Saless, Iranian leaders believe that if Washington's strategy is to prolong a "no war, no peace" situation indefinitely, Iran will gradually be worn down while the United States enjoys the benefits of an undeclared ceasefire.

"From Tehran's perspective, this situation must be disrupted, even if the cost is a broader conflict," he wrote.

He added that renewed attacks carry only a limited risk of triggering all-out war while serving a more important strategic objective: demonstrating to Washington that it cannot unilaterally determine when conflict begins or ends.

Hormuz complicates diplomacy

The military escalation has unfolded alongside increasingly difficult negotiations over navigation through the Strait of Hormuz.

Deputy Foreign Minister Kazem Gharibabadi said Tuesday that Oman had proposed dividing responsibility for a new shipping lane equally between the two countries, but insisted the arrangement failed to address Iran's concerns.

Former Israeli intelligence official Danny Citrinowicz argued the latest attacks reflected what he described as a post-Khamenei doctrinal shift, with Tehran now prepared to initiate offensive operations rather than relying primarily on deterrence.

"Today Iran is also prepared to initiate offensive moves and to rely deeply on its missile array, drones and regional proxies,” Citrinowicz wrote on X.

"The leadership in Tehran is prepared to take significant risks because it sees the current confrontation as a decisive battle over its regional status and its ability to shape the security reality in the Middle East."

Former Iranian diplomat Kourosh Ahmadi argued Oman has little room to accommodate Tehran because of its obligations under the UN Convention on the Law of the Sea and pressure from Washington and regional states.

"The problem now is that the Strait of Hormuz has become an issue of prestige for both Iran and the United States, making it unlikely that either side will easily accept the other's conditions."

Regional conflict widens

Saudi Arabia announced Tuesday that it had intercepted several drones launched from Iraq towards Saudi oil facilities, blaming Iran-backed groups.

In response, Saudi and US forces jointly bombed positions held by the Iran-aligned Popular Mobilization Forces (PMF) in Iraq for the first time, reportedly killing numerous fighters..

The US Central Command and Saudi officials described the operation as retaliation for more than 30 drone attacks over three days targeting US forces and Saudi energy infrastructure, allegedly carried out by Iraqi groups aligned with Iran under IRGC direction.

Iran's state broadcaster IRIB quoted an unnamed military official as denying any Iranian involvement in projectiles launched from other countries towards Saudi Arabia and calling claims linking Tehran to such attacks "a major miscalculation."

Commenting on the broader trajectory of the crisis, social media commentator Tohid Javadi warned that a much larger confrontation could lie ahead.

"A major—perhaps very major—conflict may be approaching. Under the current circumstances, neither the Islamic Republic can surrender nor does Washington appear willing to reach an understanding without extensive bombing and breaking a few of Iran's bones."