What is hyperinflation and what causes it?

Can you imagine a loaf of bread costing $2 and by the end of the month it costs $10 or more? What do you do if your paper money buys less every day until it becomes worthless? While most of us can't imagine that extreme happening, it has happened to other countries and has, in fact, also happened in the U.S. There was a time when the U.S. currency was essentially worthless, and we'll go over that later in the article.

In this piece, we'll talk about hyperinflation — its history, its causes, its risks, what happens when it occurs, and what you should do when it hits the economy.

What exactly is hyperinflation?

If inflation is the decrease in purchasing power of money, and if you ventured to guess that hyperinflation is an economic term for high, accelerating inflation, you'd be right.

Hyperinflation occurs when the cost of goods and services rise more than 50% per month, and it's characterized by a persistent rise in prices, excessive supply of money in the economy and intense inflation.

Hyperinflation is the worst — and most extreme — type of inflation. It’s also the rarest type of inflation, though it has occurred throughout the course of history.

Do you see some common threads between these situations? What exactly causes hyperinflation? Let’s take a look.

Extremely rapid inflation, otherwise known as hyperinflation, commonly occurs when printing money occurs on a wide scale, which gets added to the money supply, typically to cover budget deficits. In a damaging combination of this additional printing with no economic growth opportunities, the real value of the currency often decreases, and prices rise, often increasing daily percentages. However, hyperinflation can be caused by other factors, such as a bad economy, disease, a natural disaster and other factors that lower supply and increase demands to the extreme.

Hyperinflation differs from less extreme bouts of inflation, which are measured in monthly price increases. In contrast, hyperinflation is measured daily. For example, hyperinflation might rise 5% to 10% per day.

Simply put, hyperinflation is an economic disaster and can quickly erode the real value of local currency.

When basic goods become scarce, hyperinflation causes a surge in prices for those basic goods and services. For instance, if supply chains are strained but demand remains high, store prices can’t decrease until production and shipping costs decrease.

It becomes more expensive to take on debt, so you may not be able to meet your personal goals, such as buying a home. If you’ve already taken on debt or don’t have a good handle on your debt, hyperinflation could go as far as to influence your own debt levels by putting you further into debt.

You might find yourself wondering what to buy before hyperinflation hits, if you perceive even a small bit of inflation in the economy. However, it’s important to remember that hyperinflation is very rare. Even so, what do you do in hyperinflation situations? How do you deal with hyperinflation in day-to-day life? What do you buy and what do you invest in?

Consider doing things like protecting your portfolio by keeping your money in a safe place and paying off debt to ward off the effects of extreme inflation. You can also prioritize your most important needs — try thinking about what personal finance considerations should take priority over everything else, such as implementing a budget now to fend off money woes in the future or trying to avoid rampant credit card use. It’s the “prep now, worry less later” adage that you can take advantage of. You might even go as far as to store dry goods and other nonperishable items for later.

Furthermore, consider what is benefiting from inflation and consider investing in those areas — things like oil, lumber, beef, wheat or corn rise in price when inflation rears up. It’s one way you could turn inflation on its head and potentially find a benefit in it.

Experts consider several factors when looking for signs of hyperinflation — current economic activity, the Bureau of Labor Statistics, the Producer Price Index (a measure of the average change over time in the selling prices received by domestic producers for their output) and the Consumer Price Index (a measure of certain goods and change of their prices — it tells us whether CPI inflation is occurring), to name a few.

The Federal Reserve also works to control inflation (and prevent hyperinflation) through what’s called a contractionary monetary policy . In short, the Federal Reserve can provide a balm to the economy by decreasing the rate of inflation. The International Monetary Fund (IMF) also works toward growth and prosperity within its 190 worldwide countries.

It’s a good idea to be aware of the signs of when hyperinflation may come to a head, so you can take steps to protect your finances and prepare to soldier through, should the need arise. Keep an eye on economic movements and check in with what the experts are saying, so you stay informed.