What is hyperinflation?
What is hyperinflation: Hyperinflation refers to extremely high and typically sustained inflation, commonly defined by economists as price increases of 50% or more per month.
Key signs and effects: Signs of hyperinflation could include a loss of trust in the government or significant devaluation of currency, which can contribute to severe economic disruption and social and political instability.
Why it’s rare in stable economies: Though not impossible, hyperinflation rarely occurs in countries with stable economies because of institutional frameworks such as independent central banks, fiscal controls, and regulatory oversight.
The definition and key features of hyperinflation
How economists define it
Economists define hyperinflation as inflation rates that are higher than 50% a month.
What makes it different from high or normal inflation
Hyperinflation is extreme inflation that leads to skyrocketing prices in very short periods of time, sometimes accelerating over weeks or months rather than years. It causes the value of money to drop dramatically in a short period of time. On the other hand, high inflation generally refers to price increases that are meaningfully above a central bank’s target, which in many developed economies is around 2% per year.
Key signs and indicators
General signs of hyperinflation can include wildly fluctuating, skyrocketing prices which can lead to shortages of non-perishables. Other signs include a trend in people moving their funds away from cash into alternatives like gold, a drastic drop in the exchange rate, a sharp contraction in bank lending or tighter credit conditions, and an overall devaluation of currency.
What causes hyperinflation?
A combination of causes are often associated with hyperinflation:
Excessive money supply growth unbacked by economic output
Governments will sometimes expand the money supply rapidly without corresponding growth in economic output or public confidence, leading to an influx of currency. An excess of money that doesn’t align with available goods and services produced in the current economic climate can then lead to inflation.
Loss of confidence in the currency or government
Confidence in both the currency and the institutions managing it may deteriorate.
Demand-pull, supply shocks & structural weaknesses
Demand-pull happens when demand for goods or services is suddenly high while supply is low, leading to increasing prices.
Supply shocks generally happen when something abruptly causes a shortage of goods and services. Things like sudden production cost increases or war can lead to supply shock.
Hyperinflation can also happen when the economy can’t produce goods and services, or when a country’s supply chain is significantly disrupted — perhaps because of infrastructure weaknesses or supply chain inefficiencies.
What happens during hyperinflation & its effects
- Collapse of purchasing power: Because currency loses so much value, money doesn’t go nearly as far.
- Currency instability & shift to alternatives: Currency values tend to drop drastically with hyperinflation, leading people to shift money into alternatives like seeking alternatives to holding cash, such as foreign currencies, commodities, or informal exchange arrangements.
- Economic, social & political consequences: This level of instability can cause severe hardships that might lead to mistrust of the government, protests, political riots, and general unrest. Over time, these pressures can lead to lasting changes in economic structures and political systems.
How economies & individuals can respond or protect themselves
- Macro-level measures governments take: Governments can cut spending, raise taxes, and tackle debts as protective measures. Banking and financial regulations or reforms, including an increase in interest rates, may also be options.
- Individual & household strategies: In periods of high inflation, households often focus on managing expenses, understanding how inflation affects borrowing costs, and maintaining financial flexibility.
Is hyperinflation a risk in developed economies today?
Why It’s rare in stable economies
Countries with stable economies usually don’t experience hyperinflation because they typically have established institutions such as independent central banks, credible fiscal policy, and stable legal frameworks.
Hyperinflation could still happen in certain catastrophic instances, such as war or an overall collapse of a country’s government. In fact, the Weimar Republic (Germany) experienced a 29,500% monthly inflation rate after WWI. Venezuela experienced extremely high inflation over several years, with monthly inflation rates of over 50% reported during much of 2018 in part because of a drop in oil market prices and an influx of printed money.
What could be warning signs to monitor
Even in stable economies, economists often point to warning signs such as instant and huge price increases, a sudden outflow of printed money that isn’t backed by government assets, a drastic drop in the value of currency, and a general public sentiment of distrust in the government.
Bottom line
Hyperinflation is associated with inflation rates of more than 50% and sudden, drastic price increases. While hyperinflation is pretty rare in stable economies, it can happen in circumstances such as war or with situations like extreme government spending or printing of money. Understanding what hyperinflation is and what steps you can take to protect your household can help households better understand economic risks and make more informed financial decisions. In hyperinflation, traditional cash savings lose value rapidly, making it critical to prioritize tangible, or high-yield assets. Explore high-yield savings accounts and CDs from Raisin.
Frequently asked questions
Hyperinflation is commonly defined as inflation of at least 50% per month.
Hyperinflation involves sudden, drastic spikes in prices and the inflation rate while regular inflation comes with smaller, more stable increases over time.
No, but there have been times of high inflation. For example, the U.S. has experienced periods of elevated inflation, such as during World War I and the late 1970s, but never hyperinflation. Then the country experienced the “Great Inflation” period, complete with inflation rates that topped out at approximately 14% in 1980.
It would be a major challenge, but hyperinflation has historically required aggressive policy measures, such as fiscal consolidation, monetary tightening, or structural reforms.
The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
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