Is Iranian Hyperinflation a Mirage?
Djavad Salehi-Isfahani suggests that the conventional wisdom of so-called Iranian hyperinflation caused by crippling Western sanctions deserves a closer look, as there is lack of connection between devaluation, printing of money and inflation in Iran. Guessing wrong on the impact of sanctions can be costly for US policy.
The story of Iran’s hyperinflation was not a hoax, but instead reflected a deep misunderstanding of Iran’s economic situation. Sensational stories of economic collapse in Iran appeared in the blogosphere and in the mainstream press — and they simply were not true. Since accurately understanding the impact of sanctions is critical for setting US policy, what lessons can we learn from this episode?
In late September 2012, Iran’s currency took a dive, falling by about 50% in two weeks. This was seen as a definitive sign that sanctions against Iran were bearing fruit, that Iran’s economy was on the verge of collapse and that the West would face a humbled Iranian leadership in the nuclear standoff. The key to the story was a prediction published on the website of the conservative Cato Institute that the devaluation would cause prices in Iran to rise by 70% per month, doubling every 38 days, which is hyperinflation.
The prediction was based on faulty analysis, and it ignored the simple fact that the same Iranian government that prints the rial also earns all the foreign exchange. But it nevertheless became the standard story. Forbes likened the crisis to a “weapon of mass destruction” that would send Iran “the way of Weimar,” and the Bloomberg headline read, “Turning Iran’s Currency Crisis Into a Revolution.” The Boston Globe was even more specific: “As Iran’s economy crashes, sanctions could yet bear fruit.” The Financial Times, the New York Times, The Wall Street Journal and the Washington Post all reported the hyperinflation story in print or online.
Three months after the rial's sharp devaluation, we can be certain that claims about hyperinflation were unfounded. For the first two months, the Consumer Price Index (CPI) rose by 4.5% each month, but in the third month the rate of increase slowed to 2.5%. At this rate, inflation for the year will likely reach above 30% — but that is still a far cry from prices doubling every 38 days.
