It’s easy to confuse hyperinflation with its sibling, inflation. Inflation measures the pace at which the prices of goods increase over time. On the other hand, hyperinflation refers to rapid, out-of-control price increases. On the very opposite side of the scale is deflation, which refers to a significant drop in prices.
When hyperinflation occurs, prices tend to rise more than 50 percent each month.
Read on to learn about what hyperinflation is, what causes it, a list of real-world examples, and how hyperinflation impacts a country.
Hyperinflation is the unrestrained increase in prices for goods and services in an economy. As resources grow scarce, like gas or food, prices climb as the demand outweighs the available supply.
Unlike inflation, hyperinflation is an economic phenomenon that doesn't occur very often. That said, it has occurred throughout history in places like China, Germany, and Zimbabwe, to name a few.
In the United States, the Consumer Price Index (CPI) monitors inflation and has determined that, on average, the annual rate of inflation has been approximately two percent each year since 2011.
In comparison, since hyperinflation is when prices rise 50 percent in a single month, this phenomenon works out to about a 5 to 10 percent increase every day.
Causes of hyperinflation
Due to the alarming rate at which prices rise during a period of hyperinflation, this phenomenon can harm a nation’s economy. The most common reasons hyperinflation occurs include:
One: An excessive money supply. In times of depression, the economy is suffering from a negative growth rate. As a result, governments typically increase the supply of money through the federal reserve to encourage spending and investments. This can last months or years and result in high unemployment, individual and professional bankruptcies, little to no production output, and lenders handing out less loans.
Businesses will bump up prices if there’s no growth. Consumers, now with more money thanks to federal distribution, will pay those new prices — leading to inflation. As businesses charge more and more for items and as people spend more and more in response, the government prints more money, and inflation quickly transforms into hyperinflation.
Two: Loss of confidence in the economy. This usually occurs during a period of war. A country’s currency can lose its value after conflicts, which leads to fiscal and economic collapse. Those who exchange goods and services will bump up their prices to gain collateral for doing “risky business” by accepting the local currency.
4 examples of hyperinflation
As mentioned earlier, hyperinflation isn't common. Nevertheless, this doesn't mean it won't occur.
One of the most prevalent real-world examples of hyperinflation is former Yugoslavia in the 1990s. The country was experiencing high inflation and was on the verge of geographical and political separation. The country’s leader, Slobodan Milosevic,emptied the national treasury to hand out loans to his allies. The central bank began printing money so the state could afford to pay off its expenses, resulting in hyperinflation.
Inflation rates rose twofold each day, climaxing at a rate of 313 million percent in one month.
Eventually, the German mark (the German currency) was adopted, which assisted in stabilizing the economy, but not before food shortages, a halt in production, and a 50 percent drop in earned income had occurred.
The Weimar Republic in Germany experienced hyperinflation in the 1920s, after World War I.
To control the climbing inflation rates, the bank issued over 92 quintillion German marks (the German currency). This method proved effective until Germany was weighed down with reparations from the Allied Powers once the war ended. Now an additional 132 billion in debt, production ceased, leading to food shortages and rising prices to make up for it. The inflation rate reached nearly 21 percent each day.
This is the most recent example of hyperinflation, occurring between 2013 and 2018. Through efforts to promote a new cryptocurrency, the Venezuelan bolivar became a weak form of currency. The country was also in debt for over 100 billion.
Consequences included plummeting employment rates — at 20 percent, this rate nearly rivaled that of the Great Depression in the US — as businesses closed down.
In 2018, the inflation rate was 65,000 percent. The country is still suffering from hyperinflation in 2021.
The United States
The US has only experienced hyperinflation during the American Civil War, which lasted from 1860 to 1865. At the time, the US was still part of the British Confederate government, and the British printed an excess of money to fund the fight to end slavery
Effects of hyperinflation
At its most basic level, hyperinflation influences consumer behavior. Prices rise, so people pay more for goods and services while also stocking up on goods for later. Hoarding goods causes shortages, thereby increasing demand but also limiting supply and causing prices to soar even higher.
Cash also loses its value, and, by extension, a nation’s currency experiences devaluation. The nation’s currency isn’t worth as much compared to foreign currency, and domestic companies and importing services go out of business while unemployment rates climb.
The government’s response to hyperinflation is to print more money, but that only accelerates inflation rates.
On the individual level, only those in debt and unable to repay their loans benefit from hyperinflation. Export businesses also are at an advantage because it becomes more affordable to move goods out of the country.
Wise money management is essential in preventing economic phenomenons like hyperinflation — whether that’s at a national, state, or individual level. Being accountable for and looking after your finances can positively impact the economy. Everyone’s actions matter.
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