What Is Hyperinflation?

A state of hyperinflation is characterized by general price rises that are excessive, happen too quickly, and are not under control. Hyperinflation refers to quickly increasing prices for goods and services, usually above 50% per month, whereas inflation gauges the rate of price increases for products and services.

Hyperinflation happens seldom in industrialized economies, but it has happened several times in places like Georgia, Russia, Hungary, China, and Germany.

Understanding Hyperinflation

The Bureau of Labor Statistics uses the Consumer Price Index (CPI) to assess inflation. The CPI is a measure of the buying power of the dollar. Approximately 94,000 items and services, 8,000 rental housing unit quotations, and the costs of airfare, clothing, home goods, prescription medications, used cars, and mail are all included in the CPI.

Inflation around 2% is what the Federal Reserve considers a healthy target over the long run. If inflation becomes too high, it becomes hyperinflation. High inflation is defined as inflation above 5%. Hyperinflation is defined by monthly inflation rates of 50% or more.

From 2013 through 2022, the Consumer Price Index (CPI) assessed inflation in the United States at an average annual rate of roughly 2.5%. From June to April of 2023, the average was 5.55%.

Hyperinflation can cause prices to rise daily or weekly, significantly impacting the amount that customers pay for essential goods. Think of it this way: You have a regular shopping routine. Your weekly shopping expenditure might go from $500 one week to $675 the next and as high as $911 the week after that if the economy experienced a daily inflation rate of 5%.

Reasons for Excessive Inflation

There are several potential reasons for hyperinflation; however, the most prevalent ones are as follows:

An Overabundance of Currency

For the most part, the money supply is under the jurisdiction of central banks. When economic conditions demand it, such as during a recession or depression, central banks can raise the money supply. The goal here is to get people to borrow money and spend it, as well as banks to lend.

However, hyperinflation can happen if GDP growth isn’t enough to counteract the increase in the money supply. When gross domestic product (GDP), a measure of economic production, remains stagnant, companies hike prices to increase profits and remain in business.

With increased disposable income, shoppers can afford higher costs, which drives inflation. The central bank will create more money, businesses will raise prices, and consumers will pay more if economic production remains flat or shrinks as inflation rises. Hyperinflation is the result of a vicious cycle of ever-increasing inflation rates.

Consumer-Driven Price Climb

In a demand-pull inflation situation, the total demand exceeds the whole supply. The supply shortage, in response to the demand surge from consumers and companies, causes prices to rise sharply.

A confluence of factors, including irresponsible monetary policymaking, leads to hyperinflation.

How Hyperinflation Affects Things

Lots of bad things can happen as a result of hyperinflation. People could start stockpiling food and other necessities. Consequently, food shortages may occur.

Extreme price increases lead to a decline in the buying power of money, a phenomenon known as inflation. People have less disposable income; therefore, they must spend more to purchase less. Consequently, they cannot afford necessities and have less money to pay bills.

Additionally, banks and other lending organizations may fail if customers stop putting their money in them. If people and companies cannot pay their taxes, governments may not have the funds to provide basic needs.

Hyperinflation Preparation Strategies

It’s essential to keep in mind that industrialized nations with a central bank that works to control inflation seldom experience hyperinflation. The good news is that you can mitigate the impact of both low and high inflation on your investment portfolio by taking specific measures.

During inflation, a diversified and well-balanced portfolio can help mitigate losses. Because their value often rises during inflation, commodities and real estate can mitigate their negative impacts. The principal you invest in Treasury Inflation-Protected Securities (TIPS) changes with inflation, making them a hedge against rising inflation.

Investing in inflation-switching mutual funds or exchange-traded funds is another way to protect your portfolio against inflation.

Hyperinflation in Practice: Actual Cases

The former Yugoslavia

The 1990s were a time of terrible and protracted hyperinflation in the former Yugoslavia. The nation was already facing inflation rates higher than 76% per year and was on the brink of collapse.

In 1991, it came to light that Slobodan Milosevic, the leader of the Serbian province at the time, had embezzled $1.4 billion in loans from the Serbian central bank and given them to his friends and associates.

To meet its financial responsibilities, the government’s central bank had to create a lot of money because of the theft. Consequently, hyperinflation swiftly swept the economy, wiping out any remaining wealth and compelling the populace to barter for products. The inflation rate was mind-boggling at 313,000% each month, which nearly quadrupled daily.

Food shortages ensued as the government swiftly seized control of production and pay. Consequently, production slowed, and revenues plummeted by almost 50%. The economy became more stable once the government started using the German mark as currency.

Poland, Hungary

After WWII, hyperinflation hit Hungary. Hungarian inflation peaked at a daily rate of 207%.

Zimbabwe

Hyperinflation hit Zimbabwe in March 2007 and persisted until early 2009, reaching a daily inflation rate of 98%. Following a series of droughts and subsequent drops in GDP, the nation entered its hyperinflationary phase in 1999.

The government started spending more money, and the country had to borrow more. It raised taxes to compensate veterans of the independence fight for their service, went to war in the Congo, and borrowed money from the International Monetary Fund to raise living conditions and enhance growth.

People started fleeing to other nations due to the government’s decision to create money to cover the bills, leading to a surge in inflation. As a result of the economic collapse in 2010, millions of people have fled the nation.

What are the consequences of hyperinflation?

Symptoms of hyperinflation are always present. If U.S. economists detect hyperinflationary tendencies, the Federal Reserve will employ all permissible monetary policy instruments to forestall their occurrence. Long before inflation reaches 50%, this occurs. Two recessions ensued when inflation was out of control because Federal Reserve Chair Paul Volcker hiked rates to over 21% to battle rates over 14%.

Could the United States experience hyperinflation?

Unless the economy takes a nosedive, hyperinflation will unlikely hit the United States. Numerous instruments are available to the government and the Federal Reserve to forestall hyperinflation.

Which hyperinflation era was the worst?

During the period of hyperinflation in Hungary between August 1945 and July 1946, the daily inflation rate reached 207%.

The Final Analysis

When a country’s inflation rate increases by 50% or more in a month, it is considered hyperinflation. The fact that a country is seeing high inflation—defined as inflation of 5% or more—is distinct from this.

When a country experiences hyperinflation, consumer prices skyrocket, and the ability to pay bills and manufacture products and services becomes severely limited, if not eliminated. As a result, many are finding it increasingly difficult to pay for the rapid increases in the prices of essential commodities. War, natural calamities, or governmental corruption are common causes of hyperinflation, but they happen rarely.

Conclusion

• The term “hyperinflation” describes an economy where prices rise at an unchecked rate, usually more than 50% per month.
• Hyperinflation can ensue when a central bank prints too much money and circumstances impact the productive economy.
• When demand exceeds supply, as may happen in hyperinflation, necessities like food and gasoline can skyrocket.
• Even though instances of hyperinflation are unusual, once they start, they can quickly become unmanageable.