Hyperinflation

Hyperinflation

What is hyperinflation?

Hyperinflation is very high inflation. It refers to the rapid, excessive, and uncontrolled general rise in prices in the economy. While inflation measures the rate at which the prices of goods and services rise, hyperinflation is fast-growing inflation that typically exceeds 50% per month.

While hyperinflation is rare in advanced economies, it has happened many times throughout history in China, Germany, Russia, Hungary, and Argentina.

Hyperinflation can occur during war times and economic turmoil in the mainstream manufacturing economy with the central bank printing excessive money.

Understanding of hyperinflation

Hyperinflation happens when prices have risen by more than 50% in a month during certain period. For comparison, according to the US Bureau of Labor Statistics, the recommended level, measured by the CPI (Consumer Price Index), is about 2% per year. The CPI is simply the price index for a selected basket of goods and services. Hyperinflation causes consumers and businesses to need more money to buy groceries due to higher prices.

While rising prices measure normal inflation, hyperinflation is measured by exponential daily growth that can be as high as 5-10% per day. Hyperinflation occurs when the rate exceeds 50% within a month.

Imagine the cost of food going from $500 a week to $750 a week next month to $1125 a week next month etc. If wages don’t keep pace with inflation in the economy, people's living standard falls because they cannot afford to pay for their basic needs and living expenses.

Hyperinflation can cause a few consequences for the economy. People are hoarding goods, including perishables such as food, due to rising prices, which in turn can lead to food shortages. When prices rise, cash or savings held in banks fall in value or become worthless because money has much less purchasing power. The financial situation of consumers can lead to bankruptcy.

In addition, people stop investing their money in financial institutions, so leading banks and lenders will go bankrupt. Tax recipients may also fall.

Example of hyperinflation

The most recent example of hyperinflation is Venezuela’s economic crisis that began in 2013 and continues today. In 2018 inflation was 1,700,000%, GDP fell by 15%, more than 3 million people left the country. Venezuela ranks 169th (out of 180) in the Corruption Perceptions Index, approximately 30% of the population has no job. Currently, in March 2022, inflation is 2,000%. As one of the world's largest oil producers, the country is experiencing an acute shortage of basic necessities, food, medicine and gasoline. Despite slowing inflation and improving situation, many families in this South American country are struggling to make ends meet.

Why hyperinflation occurs

Hyperinflation has two main causes: an increase in the money supply and demand-pull inflation. The first occurs when the government of a country starts printing money to pay for its expenses. As the money supply increases, prices rise, just as in normal inflation.

Another cause, demand-pull inflation, occurs when a surge in demand exceeds supply, causing prices to rise. This may be due to an increase in consumer spending due to a growing economy, a sudden increase in exports, or an increase in government spending.

These two reasons often go hand in hand. Instead of cutting the money supply to stop inflation, a central bank can keep printing more money. When too much of the national currency circulates around, prices skyrocket. Once consumers realize what is happening, they expect inflation to continue. They buy more now so they don't have to pay a higher price later. This excess demand exacerbates inflation. It's even worse if consumers hoard goods and create shortages.

Effects of Hyperinflation

Hyperinflation quickly devalues ​​the local currency in foreign exchange markets as its relative value against other currencies falls. This situation will force holders of the national currency to minimize their savings and switch to more stable foreign currencies.

Trying not to pay higher prices tomorrow due to hyperinflation, people usually start investing in durable goods such as equipment, cars, jewelry, etc. When hyperinflation develops, people start hoarding perishable goods.

However, this practice creates a vicious circle: as prices rise, people accumulate more goods, creating higher a demand for goods and further price increases. If hyperinflation continues unabated, it usually leads to a major economic collapse.

Severe hyperinflation could lead to the transition of the domestic economy to a barter economy, which will seriously affect the confidence of the business community. It can also destroy the financial system as banks stop lending.

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2022-07-27 • Updated

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