How does inflation affect financial markets?

Economic inflation, as one of the most significant economic phenomena, not only reduces household purchasing power but also directly impacts all aspects of financial markets, from the stock market and gold to Forex and cryptocurrencies. In conditions like the Iranian market, where inflation rates are often above 30-40%, investors struggle greatly with preserving the value of their assets, and the question often arises: what should we buy during inflation?

In this article, we provide a simple overview of what economic inflation is, its effects on various financial markets such as gold, currency, and Forex, and offer practical strategies regarding the impact of inflation on financial management for investing in Iran, in order to determine how to achieve optimal financial management under these conditions. With the help of this article, decision-making regarding the choice of investment type in these circumstances will become easier.

What is Economic Inflation? (Simple Definition)

Economic inflation means that the prices of goods and services are rising! When inflation occurs, the money in your pocket can no longer buy as much as it used to; this means the purchasing power of money has decreased. For example, suppose that today with 100,000 Tomans, you can buy a basket of essential goods like bread, milk, and eggs. If inflation occurs, that same basket might cost 120,000 Tomans or more next month. This means the same amount of money from the previous month cannot guarantee you the same amount of goods.

Of course, you must keep in mind that economic inflation is not just a simple increase in prices; it is a continuous and widespread trend that occurs across all market sectors. This phenomenon is usually measured by the Consumer Price Index (CPI) and has various causes, such as an increase in the money supply in the economy, rising production costs, or wars and sanctions. Understanding inflation equations is very important for investors and ordinary people alike because this phenomenon directly affects the value of your assets, savings, and future investment decisions. In fact, inflation forms the basis of our entire discussion regarding its impact on financial markets.

The Impact of Inflation on the Economy and Purchasing Power

Economic inflation hits social aspects from the very beginning and disrupts people's daily lives, especially for the low-income strata and employees with fixed salaries whose purchasing power decreases sharply. When the prices of bread, housing, and food increase by 20-40% every month, families are forced to forgo essential needs, social inequality intensifies, and psychological pressure on society increases. In Iran, with chronic inflation above 30%, the weaker strata suffer more than others because their incomes do not grow at the same rate as costs, and this unfair distribution of wealth makes poverty deeper.

These social effects quickly spread to the macroeconomy and slow down or halt economic growth; investments decrease, producers struggle with higher costs, and stagflation occurs. Ultimately, inflation appears in the financial market, where the value of the national currency (like the Rial) erodes and assets like gold, stocks, or foreign currency emerge as the ultimate refuge. This shift forces investors to change their strategies and, instead of bank savings, rush towards financial markets.

The Effect of Inflation on Various Financial Markets

 

Inflation does not affect all financial markets equally; some markets have high resistance to inflation, while others, unfortunately, will undergo significant downward changes. These differences stem from the nature of the assets: real assets like housing and gold, which have intrinsic value, usually grow alongside inflation, whereas financial assets with fixed income like bonds are very vulnerable. Furthermore, the relationship between the market and inflation is not always linear: in the short term, inflationary concerns may cause the market to collapse, but in the long term, investors look for protected assets. The key point, however, is that choosing the right market under conditions of economic inflation is the only way to protect capital.

Inflation in the Housing Market

The housing market is one of the most resistant markets against inflation. When inflation rises, property prices also increase because construction costs, raw materials, and transportation costs go up as well. Additionally, rental rates also rise with inflation, creating a stable and predictable income. Research has shown that in the long term, the housing market performs better than bank deposits and protects the real value of the asset. However, in the short term and during periods of stagflation (such as the years 2020 to 2024 in Iran), transactions decrease and liquidity becomes a problem.

In Iran, however, the inflation of over 40% (2023-2024) combined with sanctions has placed severe pressure on the housing market, bringing the price per square meter in Tehran to around 87 million Tomans (a 182% growth since the beginning of the 13th administration). In the years 2018-2020, Trump's sanctions caused a 67.8% jump, but in 2021-2022, with the decrease in inflation expectations (elections and JCPOA negotiations), real prices fell by 23%. In 2023, regional tensions brought a 24% growth in real prices, and now after these events in Iran, it can be concluded that housing is an inflationary refuge, but low liquidity and the stagnation of transactions (due to weak purchasing power) make it unsuitable for the short term.

Inflation in the Stock Market

The stock market is a double-edged tool against inflation: in theory, company revenues and profits should increase alongside inflation, and stock prices should also rise. Therefore, the stock market can act as a capital refuge to counter the devaluation of the national currency. But in practice:

• If inflation is accompanied by economic stagnation (stagflation), companies incur higher costs, and real profits decrease.
• In the long term (5-10 years), the profit from investing in the stock market usually surpasses other markets because operational growth plus inflationary growth causes stock prices to grow twofold.

In Iran, sanctions drove liquidity toward stocks, but the increase in interest rates and company costs reduced profitability. In 2024, with persistent inflation, the stocks of export-oriented companies (petrochemicals) grew, but the overall market lagged by -30%; as a result, one can analyze that while one might rely on the stock market in the long term, sanctions-related fluctuations carry high risk.

Inflation in the Gold Market

 

Gold is known as a traditional "store of value" and the most reliable asset against inflation. In conditions of inflation or economic crisis, gold shows its true worth: with rising inflation, demand for gold increases and its price rises. This positive and reliable relationship stems from the fact that gold has intrinsic value and is considered a safe investment. For example, in 2025, the price of gold per ounce exceeded $4,000, as people were worried about the status of the dollar and inflation; however, the negative point is that gold prices have volatility, and in the short term, real growth might be lower than expected!
Regarding Iran in particular, it is interesting to know that gold has shown the best resistance to inflation in Iran. With 40%+ inflation and sanctions, the Emami Gold Coin more than tripled from 2021 to 2024 (from ~12 to 45 million Tomans). In 2018 (Trump's sanctions), it had 80%+ growth; in 2023, tensions increased the price by 50%. One of the reasons for this resistance has been the investment demand of Iranians and global growth in gold (to $4,000/ounce in 2024).

Inflation in the Currency and Forex Market

 

 The currency market (e.g., the dollar) is one of the highest-yielding options under inflationary conditions, especially in Iran! In years of severe inflation (2018, 2020, and 2024), the dollar experienced significant price jumps due to the decrease in the value of the Rial and the start of investors rushing toward the dollar. However, note that the dollar itself also has about 2% global inflation annually, and its purchasing power decreases. Furthermore, the dollar market is volatile in the short term, but in the long term, it is valid due to the upward trend resulting from the decline in the Rial's value. The Forex market (EUR/USD) is, however, shifting its position toward alternative digital currencies, as it might be a better investment choice under inflationary conditions. Generally, currency is the best inflationary hedge in Iran, but its political risk (sanctions) and short-term volatility are high.

 

Inflation in the Cryptocurrency Market

 

 Cryptocurrencies (especially Bitcoin) have grown more than other assets against inflation. Bitcoin, with about 24,000% growth in the last 10 years, has been the highest-yielding cryptocurrency. This growth is partly due to investors' efforts to find alternative assets against inflation and monetary policies. But the sensitive point is that cryptocurrencies are very volatile and somewhat high-risk, and are not suitable for conservative investors.
If we want to examine this issue, i.e., the effect of inflation on cryptocurrencies, specifically in our own country, we must admit that cryptocurrencies in Iran experienced explosive growth due to inflation and sanctions! Bitcoin jumped from about 1 billion Tomans in 2021 to 5+ billion in 2024 because sanctions cut off access to traditional currencies. The root cause of these events should be traced back to the years 2020-2022.

Comparing the Impact of Inflation on Traditional and Modern Financial Markets

Now that you are familiar with the impact of economic inflation on each financial market, in the table below, you can have a brief and analytical look at these effects:

 

 

The Impact of Inflation on Investment Decisions

Iranian investors face challenges with both asset protection and profitability during chronic inflation; therefore, they turn to short-term and emotional behaviors. The first effect of inflation is that a short-term investment perspective becomes dominant due to lack of trust, sanctions, and fluctuations, whereas, conversely, a long-term view is more suitable as assets like stocks and gold beat inflation. In such conditions, people's main concerns are liquidity pressure to cover expenses and immediate needs, which drives them toward high-risk assets.

Decisions may also fall into the trap of psychological biases, the most common of which in these conditions include:

• Fear of inflation: Hasty buying without analysis
• Herd behavior: Following friends/media and creating a bubble
• Overconfidence: Entering in false bottoms and selling at the peak
• Impatience: Selling prematurely before growth

How can we make better investment decisions in Iran despite inflation?

In Iran's inflationary conditions, intelligent decision-making requires a diversified portfolio, a long-term outlook, and risk control. Furthermore, focusing on assets that preserve their value and beat inflation is difficult but important. These approaches, in addition to dividing capital based on size and time horizon, protect you somewhat from political and economic fluctuations. Therefore, the best answer is to invest according to your target budget for every financial market that, based on our analysis, is considered in the category of suitable assets.

We have tried to examine examples of diversified investment portfolios for three budget levels in the table below and provide the closest intelligent investment strategy based on the effects of inflation on each. This proposed composition is designed based on asset optimization research during inflation in Iran and divides capital based on immediate need, long-term growth, and stability. Objective: to maintain value against inflation above 40% and also achieve an annual return of 30-60%.

 

This diversified portfolio beats inflation, spreads risk, and reduces fluctuations by up to 50%. Review it every 6 months. If you are looking for an easy way to implement these methods, stock funds can be considered to some extent because they have daily liquidity, are managed by experts, and have low costs (without the need for personal analysis). A gold fund like "Zar" or "Gohar" for protection, stock funds, ETF funds and real estate funds (REIT) for entering the housing market without direct purchase are helpful aids. Of course, brokerages should also not be overlooked in facilitating the process of this type of investment in inflationary conditions.

 

Common Mistakes of Traders During Economic Inflation

In Iran, traders under the pressure of inflation often fall into the trap of emotions and impulsiveness, which leads to losing capital; recognizing these mistakes is the first step to avoiding them. Among the common mistakes of investors in inflationary conditions are:

1. Investing 100% in one asset: Putting all money into gold or cryptocurrency without diversification increases the risk of a fall.

2. Short-term outlook (under 1 year): Selling in temporary fluctuations instead of waiting for long-term growth.

3. Following media trends: Buying based on Telegram news or rumors without analysis.

4. Ignoring liquidity: Investing in housing/land without an emergency budget.

5. Using leverage/debt: Loans for buying coins or stocks in high inflation, which multiplies the loss.

6. Ignoring hidden costs: Agency fees, sales tax, or car depreciation.

7. Lack of inflation adjustment: Keeping cash or bank deposits below the inflation rate.
 

Frequently Asked Questions about the Effect of Inflation on Financial Markets

What are the indicators for examining the effect of inflation on the currency market?

Key indicators for measuring the impact of inflation on the currency market are: Consumer Price Index (CPI), point-to-point inflation rate, annual inflation rate, and free market exchange rate (like the dollar against the Rial). CPI is the main indicator that shows the percentage change in the price of a basket of household consumer goods and services and directly affects the demand for currency for imports; for example, in Iran, an increase in CPI from 327 to 514 (example, September 2023 vs. August 2022) has brought the dollar rate from 80,000 to 130,000 Tomans. Point-to-point inflation (comparing the current month with the same month last year, such as 39.4% in June 2025) and annual inflation (12-month average, such as 34.5% in June 2025) predict the weakening of the Rial and increase currency demand. To monitor, check the Statistical Center of Iran website (amar.org.ir) and the Gold and Currency Network (tgju.org).

Why is investing in bonds wrong during inflation?

Investing in bonds (such as participation or debt securities) during high inflation, like the current conditions in Iran, is wrong because its fixed return (usually 20-30%) is less than the inflation rate (34-48%) and reduces the real value of capital. In inflation, the purchasing power of the bond's fixed interest gradually disappears; for example, if inflation is 40% and bond interest is 25%, the investor incurs a 15% real loss annually. Furthermore, the Central Bank hardly increases interest rates, so old bonds become more worthless. Conversely, inflationary assets like gold or stocks grow.

Are cryptocurrencies resistant to inflation?

Cryptocurrencies like Bitcoin are somewhat resistant to inflation because their limited supply (like 21 million Bitcoins) makes them similar to "digital gold", but extreme volatility and regulatory risks make them high-risk for Iranians.

Bitcoin has grown in global inflations (such as 2021-2022), but in Iran, with sanctions and dollar fluctuations, it might fall 50-80%. Relative resistance is due to non-dependence on monetary policies, but not guaranteed! In Iran's inflation, cryptocurrencies are not a substitute for gold and are suitable for a maximum of 10% of the portfolio. Also, for safety, use cold wallets and reputable platforms.