This study proposes an inventory model with stochastic internal and external inflation rates for deteriorating items and allowable shortages. The many economic, political, social and cultural variables affect the inflation rates. For instance, economic factors such as changes in the world inflation rate, demand level, labor cost, cost of raw materials, exchange rates, unemployment rate, productivity level, tax, liquidity, etc are effective in this direction. Therefore, the assumption of constant inflation rates is not valid, especially, when the time horizon is long. This model considers stochastic inflationary conditions. Numerical examples are used to illustrate the theoretical results, which are further clarified through a sensitivity analysis on the model parameters. It has been shown that the optimal solution is highly sensitive to considerable uncertainty of the inflation rates.