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What is hyperinflation and what causes it?

May 25, 2022 • 8 min read

What we'll cover

  • The definition of hyperinflation

  • The history of hyperinflation

  • How to tell if the U.S. is headed for hyperinflation

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 does hyperinflation mean?

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.

While there are a wide number of different types of inflation, there are four main types of inflation with descriptive monikers: “creeping,” “walking,” “galloping” and, you guessed it, “hyperinflation.” As you can infer, these types of inflation are categorized by their acceleration. It may help to compare hyperinflation to several other types of inflation:

  • Stagflation Stagflation  is a combination of slow economic growth paired with high unemployment and high inflation.

  • Deflation: Deflation occurs when the general price levels in an economy fall — it’s the opposite of inflation, when prices rise.

  • Core inflation: With the exception of food and energy, core inflation measures how fast the prices of everything else rise. The Federal Reserve uses the core inflation rate to help it set monetary policy.

  • Creeping inflation: Creeping inflation is mild inflation, which is marked by rising prices of about 3% or less per year. Mild inflation can help consumers believe that since prices will go up, they might as well buy now in order to beat back future higher prices.

  • Walking inflation: Walking inflation is characterized by inflation that rises between 3% and 10% per year. People usually buy up things they need in order to avoid future higher prices so that suppliers cannot keep products in stock. Goods and services are priced out of reach in this situation.

  • Galloping inflation: When inflation rises to 10% or more, economists call this galloping inflation. Money loses value and foreign investors steer clear of foreign currency and refuse to invest in countries with plummeting economies, which leads to loss in the economy and even loss of stability in the government.

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.

Brief history of hyperinflation

Hyperinflation has occurred in several specific points over history and around the world, including the following:

  • 1634 in Holland: Tulipmania occurred over a period of three years, from 1634 to 1637 in Holland, when the Dutch purchased tulips and many people got into the tulip trade. Eventually, buyers couldn’t afford the high prices, and the tulip market fizzled out.

  • 1795 in France: During the French Revolution, the National Assembly printed more currency to repay debts, and the currency value decreased 99% with inflation reaching over a sky-high 300%. The National Assembly implemented price controls and stopped printing currency at the end of 1795.

  • 1861 in the U.S.: The Confederacy printed tremendous volumes of paper money during the Civil War, which led to hyperinflation and an economic disaster for the Southern states.

  • 1923 in Germany: Germany’s loss in World War I sparked hyperinflation in Germany in the 1920s, partially due to reparation debts after the war and the printing of more money. The country’s monthly inflation rate reached a percentile into the thousands.

  • 1943 in Greece: During World War II Axis occupation and after, Greece experienced intense hyperinflation. It ended with the creation of a central bank, foreign assistance and an overhaul of the country’s currency.

  • 1945 in Hungary: Hungary experienced one of the worst economic disasters related to hyperinflation in the history of economics after World War II, due to repayment of war debts to Russia. At one point, prices doubled every half day!

  • 1989 in Argentina: Argentina’s hyperinflation came as a result of war debts after losing the Falklands War in 1982 and a failure by most citizens to pay taxes.

  • 1993 in Armenia: The Soviet Union breaking apart, an earthquake that killed 60,000 Armenians and a shutdown of the Armenian Nuclear Power Plant led to rampant inflation in Armenia in the early 1990s.

  • 1994 in Yugoslavia: Yugoslavia’s inflation rates reached 313,000,000% during any given month. Yugoslavia restructured its currency and monetary policies to end the sky-high inflation.

  • 2006 in Zimbabwe: Government policies and supply shortages, as well as vast government printing of its currency, the Zimbabwean dollar (ZWD), to repay debts, led to a shattering 79,000,000,000% inflation.

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

What causes hyperinflation?

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.

What happens when hyperinflation occurs?

Hyperinflation may cause the following to occur:

  • Consumers and businesses pay more for products due to higher prices

  • Devaluation of currencies

  • Effects on the money supply

  • Consumers may have to switch to more stable currencies

  • Higher demand for goods, resulting in price changes for hard assets

  • Barter economy may come into play in extreme situations

  • Banks become unwilling to lend money

  • Destruction of the financial system

  • Changes in government spending

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

Risks of hyperinflation

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.

What can you do during hyperinflation?

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.

How can we tell if the U.S. is headed for hyperinflation?

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.

Some of the tools in the Federal Reserve’s arsenal include:

  • Increasing interest rates to combat higher inflation

  • Increasing the reserve requirements for banks

  • Reducing the money supply

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.

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