Time to Panic! What Is Hyperinflation and Why Is It Catastrophic?

It’s inflation on steroids!

• Inflation is a rise in the general price level of goods and services in an economy. We haven't seen much high inflation in recent decades, but we are now! When it appears, the effects can be devastating.
• Inflation is most commonly measured by the increase in the Consumer Price Index (CPI). But it would be better to think of it as a decrease in the amount of stuff you can buy with your money. 
• When we’re talking about levels of inflation, hyperinflation is doomsday. It is often defined as the prices of goods and services increasing by 50% or more (perhaps much much more) per month. Luckily, this doesn’t occur often, but when it does, it can be devastating. 

High levels of inflation can have severe consequences. With inflation, your money’s purchasing power decreases, meaning it’s worth less. It has been proven that excessive inflation levels harm long-run economic growth on a macro level. 

What Is Hyperinflation?

When we’re talking about high levels of inflation, then hyperinflation is doomsday. It can be defined as the prices of goods and services increasing by 50% or more (perhaps much, much more) per month. Luckily, this doesn’t occur often, but when it does, it can be devastating. 

As mentioned in a previous article, there is no one cause of inflation. Hyperinflation could be caused by either overexpansion in the money supply or demand-pull/cost-push inflation.

Hyperinflation can kick in as a result of the money supply expanding to try to stimulate growth by paying for increased government spending. This could result in excessive amounts of money in circulation, causing prices to rise and potentially hyperinflate. As a result, consumers anticipate further inflation, causing panic buying and, subsequently, additional inflationary pressure!

German 100 Million Mark note from 1923

The Impact of Hyperinflation

As mentioned above, signs of hyperinflation cause consumers to panic, meaning that their behaviour alters. In anticipation of further inflation, consumers panic buy and stockpile goods, causing shortages. This can go right down to everyday essentials such as basic groceries. 

The Losers of Hyperinflation:

If you are a saver, your savings lose value. 

If you are a bank, the loans you’ve issued lose value, and nobody wants to make a deposit anymore, leading to your collapse. 

If you are an importer, you can no longer afford to import foreign goods or raw materials because your currency’s value has tanked on the foreign exchange markets (which adjust for inflation and interest rate differentials).

If you are part of the labour market, there is a good chance that your employer will go out of business.

In short, the economy burns to the ground. Governments will do their best to put the fire out, i.e. stimulate growth and alleviate the suffering. Unfortunately, this will often require printing yet more money, which (given the collapse in demand) causes further inflation.

The Winners of Hyperinflation:

Debt holders no longer have to worry because the borrowed amount has lost its value in real terms. 

Exporters now find that their exports appear relatively cheap to foreign customers. In addition, their customers pay them in their foreign, likely more stable currency, which will rise in value as the exporter’s local currency further declines.

However, even if you found yourself benefitting from hyperinflation in the ways mentioned above, you’d still be unable to escape the impact of an economy collapsing.

Examples

The most famous example is in post-WW1 Germany, where inflation spiralled out of control to the extent that notes had more value in keeping the fire burning than as a medium of exchange. In 1923, the price of bread managed to shoot up from 250 marks in January to 200,000 million marks by November that year. Workers were often paid twice per day because their morning wage wasn’t worth anything by the time they’d taken lunch. More recently, Zimbabwe's inflation rate in Nov 2008 was 79,600,000,000%, which is basically a doubling of prices every day (more precisely, a daily inflation rate of 98%, but who's counting?!)

HYPERINFLATION BASICS. COMPLETED. ✅

Sources:

1. https://www.vox.com/2014/7/24/18080392/inflation-definition-and-explanation
   
2. https://www.nerdwallet.com/uk/personal-finance/what-is-hyperinflation/
3. Header photo from Unsplash