What is hyperinflation?
Hyperinflation is a term that describes rapid, excessive, and uncontrollable general price increases in an economy. Whereas inflation Measures the rate at which the prices of goods and services rise, hyperinflation is rapidly rising inflation, typically measuring more than 50% per month.
Although hyperinflation is a rare event for developed economies, it has occurred many times throughout history in countries like China, Germany, Russia, Hungary, and Georgia.
Key points to remember
- Hyperinflation refers to rapid, uncontrolled price increases in an economy, typically at rates greater than 50% each month over time.
- Hyperinflation can arise under circumstances affecting the underlying production economy, in conjunction with a central bank printing excess money.
- Hyperinflation can cause the prices of essential goods, such as food and fuel, to spike as demand outstrips supply.
- Although hyperinflation scenarios are generally rare, they can spiral out of control once they begin.
Inflation is measured by the Bureau of Labor Statistics using the Consumer price index (CPI) to measure the purchasing power of the dollar. The CPI is a price index of approximately 94,000 products and services; approximately 8,000 quotes for rental accommodation; and the prices of airline tickets, clothing, household items, prescription drugs, used automobiles, and postage.
Generally speaking, the Federal Reserve strives to maintain what it calls a healthy inflation rate of around 2% over the long term. An inflation rate above 2% is considered high. Hyperinflation is an extreme case of inflation, not just a high rate of inflation.
Hyperinflation occurs when prices have increased by more than 50% per month. Daily increases can approach 200% or more in the event of hyperinflation.
For comparison purposes, the inflation rate in the United States as measured by the CPI has averaged around 2% per year since 2012, according to the Bureau of Labor Statistics.
For example, imagine that you always buy the same items at the grocery store. If the economy had an inflation rate of 5% per day, your grocery bill could go from $500 a week to $675 the following week, to $911 a week the following week, and so on. .
Causes of Hyperinflation
Although several circumstances can trigger hyperinflation, here are the most common causes of hyperinflation.
Excess money supply
Central banks generally control the money supply in circulation. In circumstances that historically justify an increase in the money supply, such as a recession Where the Depression— central banks can increase the amount of money in circulation. The intention behind this action is to encourage banks to lend and consumers and businesses to borrow and spend.
However, if the increase in money supply is not supported by economic growth, as measured by gross domestic product (GDP) — hyperinflation may result. If GDP, the measure of an economy’s output, does not increase, companies raise their prices to increase their profits and stay afloat.
Because consumers have more money, they pay higher prices and fuel inflation. If economic output continues to stagnate or decline and inflation continues to rise, businesses charge more, consumers pay more, and the central bank prints more money. A cycle of rising inflation rates occurs, leading to hyperinflation.
Demand pull inflation
Demand-pull inflation is a scenario in which aggregate demand becomes too high for aggregate supply. This rapidly increases prices as there are not enough goods and services available to meet the increase in aggregate consumer and business demand.
Hyperinflation is the product of many circumstances and poor monetary decision-making.
Effects of hyperinflation
Hyperinflation can lead to several adverse consequences. People may start hoarding possessions, such as food. In turn, there may be food supply shortages.
When prices increase excessively, the currency loses value because inflation causes it to lose its purchasing power. Less purchasing power means consumers are spending more to buy less. As a result, they have less money to pay bills and less money to spend on essentials.
Also, people might not deposit their money in financial institutions, leading banks and lenders to shut down. Tax revenues can also fall if consumers and businesses cannot pay, preventing governments from providing essential services.
How to prepare for hyperinflation
It is essential to remember that hyperinflation does not happen very often, especially in developed countries where a central bank is focused on containing and controlling inflationary periods. However, there are steps you can take to reduce the effects of normal or high inflation on your portfolio.
A balanced and diversified portfolio can help you reduce losses during periods of inflation. Commodities and real estate can reduce the adverse effects of inflation as their value tends to increase during these times. Treasury Inflation-Protected Securities (TIPS) can protect against rising inflation because the capital you have invested in a TIPS adjusts to inflation.
Mutual funds and exchange-traded funds that practice inflation swaps can also be used to combat the effects of inflation on your portfolio.
Real Examples of Hyperinflation
One of the most devastating and prolonged episodes of hyperinflation occurred in the former Yugoslavia in the 1990s. On the brink of national dissolution, the country was already experiencing inflation at rates above 76% per year .
In 1991, it was discovered that then-Serbian provincial leader Slobodan Milosevic looted the national treasury by asking the Serbian central bank to issue $1.4 billion in loans to his cronies.
The theft forced the government’s central bank to print excessive sums to meet its financial obligations. As a result, hyperinflation quickly enveloped the economy, wiping out what remained of the country’s wealth and forcing its people to barter for goods. The rate of inflation almost doubled every day until it reached an unfathomable 313,000,000% per month.
The government quickly took control of production and wages, leading to food shortages. As a result, revenues fell by more than 50% and production came to a halt. Eventually, the government replaced its currency with the German mark, which helped stabilize the economy.
Hungary experienced hyperinflation after World War II. At the height of Hungarian inflation, prices were rising by 207% per day.
In March 2007, Zimbabwe entered a period of hyperinflation which was equivalent to a daily inflation rate of 98% until early 2009. The country’s hyperinflationary period began in 1999 after the country experienced several periods of drought and a consequent reduction in GDP.
As a result, the country was forced to borrow more than it produced, and the government began to spend more. He raised taxes to pay bonuses to veterans of the war of independence, got involved in a war in the Congo, and borrowed from the International Monetary Fund to improve development and living standards for citizens.
The government began printing money to pay for expenses, causing inflation to rise, and residents began moving to other countries to escape the economy. By 2010, nearly 1.3 million people had left and the economy was in shambles.
What will happen in the event of hyperinflation?
Hyperinflation does not happen without any indication. If economists see signs of hyperinflation — long before inflation hits 50% in a month — the Federal Reserve will implement all authorized monetary policy tools to ensure that doesn’t happen. In the past, Federal Reserve Chairman Paul Volcker raised rates to over 21% to fight a rate over 14%, leading to two recessions before inflation was brought under control.
Will the United States enter hyperinflation?
The United States is unlikely to experience hyperinflation unless economic circumstances become very dire. The Federal Reserve and the government have many tools to prevent hyperinflation from occurring.
What was the worst hyperinflation in history?
Hungary experienced hyperinflation from August 1945 to July 1946, with a daily inflation rate of 207%.
Hyperinflation is a scenario in which a country’s inflation rate increases by 50% in one month. It is a concern if a country finds itself in a situation where it cannot afford to meet its obligations or experiences circumstances that affect its ability to produce goods and services. So, hyperinflation is not something that happens very often. Nevertheless, hyperinflation has occurred 43 times in 28 countries since 1796.