Correction:

Earlier versions of this story, including in Friday’s print edition, mischaracterized the rate of inflation in Iran. Iran’s government acknowledges an annual inflation rate of 29 percent.

Food prices, inflation rise sharply in Iran

Prices for beef and lamb had already soared out of reach, meaning fewer of the kebabs and stews beloved by middle-class Iranians. But when the cost of yogurt spiked this week, Iran’s economic troubles hit home for virtually every household in the country.

“Last year you could buy a carton for 2,000 tomans,” about $2, Mehdi Khalaji, an Iranian-born scholar and blogger now living in Washington, said Thursday, referring to the creamy side dish that is de rigueur at all Iranian meals. “This week the same amount costs 5,000 or even 6,000 tomans.” (Toman is the colloquial term in Iran for 10 rials, as the currency is officially known.)

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Protests over such price hikes brought thousands into the streets this week in central Tehran.

Calm was reported Thursday in the capital, as security forces patrolled key intersections and presided over mostly empty stalls in the city’s largest street bazaar. But the rial remained at near-historic lows, mirroring the fortunes of an economy that appears to be slipping into the kind of crisis that could provide the West with political leverage, economists and Iran experts say.

Analysts say Iran’s problems are only partly because of tough sanctions enacted by the United States and its allies in an effort to force Iran to alter its nuclear policies. Of at least equal importance are domestic policies, advocated by President Mahmoud Ahmadinejad, that led to the phasing out of a popular subsidy program that had kept prices for many staples artificially low.

But whatever the cause, the unrelenting pressure on Iran’s currency appears to be achieving an effect that some U.S. officials have been quietly advocating for years: a kind of widespread economic distress that they hope will lead to changes in Iranian behavior, if not a change in the leadership itself.

“The landscape has changed,” said Cliff Kupchan, a former State Department official and now an Iran analyst for Eurasia Group, a consulting firm. “Iran is in more trouble, and that gives us more leverage, and also more responsibility.”

But, he added, “the West can still find ways not to take advantage.”

Economists have been reporting distress signs in Iran’s economy since the beginning of the year, as new economic sanctions and an embargo began squeezing oil exports, Iran’s chief source of foreign currency. Sales of Iranian crude are down about 40 percent compared with last year, depriving the country of billions of dollars a month, industry analysts say.

Shrinking oil revenue in turn weakened the rial, driving up the inflation rate and joblessness. But in recent weeks, the slow upward creep in prices turned into a gallop, said Steve H. Hanke, professor of economics at Johns Hopkins University and a senior fellow at the Cato Institute. The rial lost 40 percent of its value this week.

Based on an analysis of Iran’s black-market currency exchanges, Hanke said prices in Iran now appear to be doubling every 40 days, depleting both the savings and purchasing power of ordinary Iranians, particularly in the cities.

“In the countryside, nothing should change all that much. People would do more barter than they normally would, and use less money,” Hanke said. “But in hyperinflation, the real value of your money is shrinking very rapidly.”

Hanke estimates that the hyperinflation rate is 69.6 percent a month; the Iranian government acknowledges an annual rate of 29 percent.

Gary Hufbauer, a trade expert at the Peterson Institute for International Economics, said recent events suggest that Iran’s foreign-currency reserves already are dwindling to the point that the government is trying to conserve what is left.

While the International Monetary Fund last year estimated Iran’s foreign-currency reserves at $80 billion, Hufbauer said the market turmoil is likely a sign that the regime has spent that down. He estimates that the reserves have dropped by 50 percent or more.

The collapsing exchange rate and shortages of goods could be countered, Hufbauer said, only by using some of that hard currency to buy more imports and stop the run on the rial. The fact that it continues, he said, is evidence the government does not want to let go of the dollars, euros or other reserve money it has on hand.

“What you get is kind of a parallel economic system,” he said. “The government imports based on what it sees as vital needs. You have a rationing of key imports, and the rest of the economy just has to function as it can.”

Inside Iran, the pain from higher prices is widespread, but it is felt most acutely by Iran’s middle class and urban working families. Only the rich and Iran’s ruling class — whose bank accounts are largely in dollars — appear to be immune, said Khalaji, the Iranian-born researcher.

“Food, transportation, everything is up, and people are worried not only about today but also tomorrow,” said Khalaji, a senior fellow at the Washington Institute for Near East Policy, a think tank.“People are extremely panicked about the economy.”

The crisis turned violent Wednesday with clashes between police and money-changers in a Tehran bazaar. Amateur video posted online showed thousands of Iranians marching on Iran’s Central Bank, some chanting slogans denouncing Ahmadinejad as a “traitor,” while others waved placards demanding that the government “Forget about Syria, think about us.”

The Obama administration has acknowledged the contribution of U.S.-backed sanctions policy to Iran’s economic plight but said Iran’s government was ultimately to blame. “The Iranian state has horribly mismanaged all aspects of their internal situation,” State Department spokeswoman Victoria Nuland told reporters Wednesday.

Other diplomats were even more blunt. One senior European official said the goal of the tightened sanctions was to “bring the Iranian economy to its knees,” and to “make it in a way that really hurts the regime more than the population. That is very difficult.”

Howard Schneider and Anne Gearan contributed to this report.

 
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