These charts show how Iran's economy is in freefall

The war in the Middle East is plunging Iran's already fragile economy into freefall.

Tehran's primary war tactic has been economic damage. Iranian strikes have targeted the energy infrastructure of its neighbors and instituted a blockade on the vital Strait of Hormuz, through which around 20% of the world's oil and gas was shipped before the war, precipitating the worst energy shock in decades.

But its own economic position is precarious.

Before the conflict, Iran was already under pressure due to sanctions. Inflation exceeded 50% in 2025. Its currency, the rial, had lost 60% of its value in the months after the 12-day war against the U.S. last July. 

Food inflation soared to 64% by October last year and had accelerated to 105% by February, with bread and cereals up 140%, and oils and fats up 219% in the year through March 2026.

Iranian banks started distributing a 10-million rial bill last month, the largest denomination note in its history, as authorities sought to contain inflation and meet demands for hard cash.

In its World Economic Outlook, the International Monetary Fund estimated that the Iranian economy will shrink by 6.1% in 2026, with 68.9% inflation. Its currency has fallen to around 1.32 million rial per U.S. dollar.

The effective closure of the Strait of Hormuz and the U.S.' subsequent blockade have cut off most of Iran's international trade, including oil exports. 

More than 90% of its annual trade passes through the strait. Renewed strains amid the U.S. blockade could cut off 70% of Iran's export revenues, Jason Tuvey, deputy chief emerging markets economist at Oxford Economics, wrote in an April 15 note.

The war has also triggered a collapse in domestic demand and imports, Tuvey said, adding that while official data are scarce, trade figures for March from trading partners showed exports to Iran have plummeted.

The Trump administration has also dangled the threat of fresh sanctions on Chinese banks facilitating transactions tied to Iran.

The combined pressure of the blockade and the threat of sanctions on Chinese banks supporting Iranian oil trade may be dealing a more severe blow to Iran's economy than many anticipated, said Robin Brooks, a senior fellow at the Washington-based think tank Brookings Institution.

"It shuts down one of Tehran's main lifelines, and brings forward the point when Iran's balance of payments hits a wall," Brooks added.

"The efficacy of this blockade and the fear it instils in Iran will [likely] bring Tehran back to the negotiating table in good faith," said Brooks.

Iran sees the Strait of Hormuz as key to its economic revival, and anyone in Washington hoping that Iran will give up the leverage of controlling it as part of a peace deal will be disappointed, Jasmine El-Gamal, founder and CEO of Avarice Strategies, told CNBC's "Europe Early Edition" in March.

She said Tehran has been "holding on to it so dearly ... because they know that that is their key, their gateway to economic revival."

Amir Handjani, senior non-resident fellow at the Atlantic Council, said that, despite severe inflation and contraction in growth, Iran may not face a full economic collapse.

He said that Iran was used to dealing with heavy international sanctions for almost five decades, and had in place an energy transaction system that bypasses U.S. sanctions. 

"So long as a peace agreement is reached with the United States that lifts sanctions and unlocks Iran's economy from the 'penalty box' it has been in for four decades, it can recover more quickly than many expect," Handjani told CNBC.

Senior Iranian economic officials reportedly warned President Masoud Pezeshkian recently that it may take more than a decade to rebuild the war-torn economy, according to Iranian local media, citing sources familiar with internal deliberations. 

Central bank governor Abdolnaser Hemmati has also reportedly urged Pezeshkian to take urgent steps to stabilize the economy, including restoring full internet access and pursuing a peace deal with the U.S. 

The key question is how quickly Tehran could repair damage to the energy and industrial infrastructure that underpins its export revenues and employs large portions of its population, analysts say. 

Waves of intense U.S.-Israeli strikes have wreaked havoc on Iran's energy infrastructure, deepening the economic squeeze as part of an effort to extract concessions from Tehran at the negotiating table. 

"The strikes on oil refineries, power plants, and related facilities represent the most acute economic wound from this conflict," Handjani said.

Iran was already running budget deficits before the war, and has suffered an estimated $200 billion to $270 billion in infrastructure damage, according to Seth Krummrich, a retired U.S. Army colonel and vice president at security firm Global Guardian.

"With no economy, failing basic social services, no alternate political or governmental option, and no global friends to save them, and an awful blistering summer headed their way, a serious humanitarian disaster is brewing in Iran," Krummrich told CNBC.

Lucila Bonilla, lead emerging markets economist at Oxford Economics, agreed that more hardship was coming for Iran.

Iran's neighbors, alienated by its attacks on their infrastructure, are already looking for alternative routes to circumvent the Strait of Hormuz, she said, while its remaining trading partners, like Russia and China, have shown little desire to come to its rescue.

"We don't know the war if will continue, whether we'll have a deal or not, but what we know is that they [Iran] have a weaker currency, much higher inflation. They will have a much larger fiscal deficit, and then with this situation of re-routing to avoid [the Strait of Hormuz] probably less leverage than what they thought they would have," she told CNBC Tuesday.

"Even under a very optimistic scenario" regarding a peace deal, the outlook is "just prolonged weakness and hardships for the people rather than recovery," she added.