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What is hyperinflation?

What causes hyperinflation?

What countries have experienced hyperinflation?

The bottom line

LearnInflationWhat Is Hyperinflation? Causes and Effects

What Is Hyperinflation? Causes and Effects

Jun 21, 2022

·

7 min read

Hyperinflation, or the skyrocketing of prices, is not a common phenomenon. The fact that it hasn’t happened in the U.S. doesn’t mean it can never happen.

Hyperinflation is when prices rise, literally, in the blink of an eye, spiraling upward and uncontrollably so fast that it disrupts almost all economic activity. Economists consider hyperinflation to be when prices increase more than 50% a month, representing a rapid erosion in consumers' purchasing power. 

Hyperinflation is rare—but it has occurred a number of times in modern history. One such time was in Germany in the 1920s, when monthly inflation at one point reached a rate of 29,500%, and consumers needed wheelbarrows of devalued currency just to buy basic goods. Subsequent economic turmoil and political unrest is thought to have led to World War II and its ensuing tragedies.

What is hyperinflation?

Hyperinflation is more than just high inflation. It occurs when prices for goods and services rise by more than 50% per month over a given time period. To put that into perspective, a healthy rate of inflation, as determined by the U.S. Federal Reserve, averages at about 2% per year. 

Regular inflation is caused by an increase in the money available in a given market, which causes prices to rise. When that occurs, consumers and businesses need more money to buy these more expensive goods. In an ideal world, wages rise to keep pace with inflation. 

In the event of hyperinflation, consumers and businesses need astronomically larger amounts of money to pay for even basic goods and services.

When hyperinflation occurs, the cost of weekly groceries may rise from $150 per week one month to $250 the next month, and $400 the third month. Because hyperinflation leads to price hikes for basic necessities like these, the quality of life in a country declines significantly when it occurs.

This can have a number of consequences. Because the cost of goods is increasing at an explosive rate on a daily basis, people may hoard goods. This can in turn cause shortages of basic necessities, like food and gas, driving prices up still further.

To make matters worse, when prices hyperinflate, individual purchasing power plummets and the value of cash decreases in value or becomes worthless. Consumers’ wealth and savings evaporate, which could lead to bankruptcy, widespread poverty, and civil unrest. 

What causes hyperinflation?

Hyperinflation can be triggered by a number of factors, and it tends to happen during times of economic and political instability. Two common causes are when there’s an excess of currency in a market, and when there’s a loss of confidence in a currency.

An excess of currency

Economic depressions (or years of negative economic growth) and recessions (negative growth for at least six months) can trigger hyperinflation. 

These periods of economic contraction result in lower output, higher unemployment, more bankruptcies, and reduced availability of credit. Central banks may try to stimulate growth by increasing the money supply to encourage banks to lend more, spurring businesses to invest and consumers to borrow and spend. 

However, a sharp increase in money supply unsupported by real economic growth can lead to hyperinflation. If economic productivity isn’t growing following a flush of new cash into the market, businesses may simply raise prices to boost their profits and stay solvent. Consumers, now with more cash temporarily at their disposal, simply pay the higher prices, which leads to higher inflation. 

As a recession or depression lingers, and the economy deteriorates further, businesses charge more, consumers pay more, the central bank mints more cash. This becomes a vicious cycle that leads to hyperinflation.

A loss of confidence in the value of cash

In times of civil, political, and economic unrest, such as wartime, there can be a wide-scale loss of confidence in a national currency as well as in a central bank’s ability to shore up the value of money. Hyperinflation can thus occur.

Businesses selling goods will attach “risk premiums” to their goods in return for accepting a troubled currency, which essentially means they will raise prices. That means consumers will have to pay higher prices. If these consumers also lose confidence in the value of a domestic or foreign currency, they can start to hoard goods they believe have intrinsic value. That leads to lower supply of those goods and even higher prices. Once more, there is a vicious cycle of inflation and possibly hyperinflation.

A loss of confidence in the value of a currency is more likely in systems that rely on so-called fiat money. These systems have currency that isn’t backed by a concrete unit of value such as gold. The danger of currency untethered to physical value is that governments are more likely to print too much of it, leading to hyperinflation.

What countries have experienced hyperinflation?

In addition to Germany before World War II, the following other countries have also experienced hyperinflation.

France, 1795-1796

The French Revolution resulted in wide-scale nationalization of land formerly owned by the Catholic Church. The new revolutionary government subsequently issued assignats to the public—notes that functioned as land-backed currency, redeemable for land by note-holders in the future. But the government issued too many notes in an attempt to shore up its debts, devaluing them in the process. That resulted in hyperinflation, which drove up the cost of everything from cheese and bread to horses and carriages. The daily inflation rate from May 1795 to November 1796 was 5%, with prices doubling roughly every 15 days.

Hungary, 1945-1946

During World War II, Hungary had sided with Germany, Italy, and Japan. It had taken on a huge amount of debt to produce goods that its biggest backer, Nazi Germany, never paid for. As such, Hungary was left with significant debts from its ramp-up in production, and a huge amount of goods it couldn’t trade away. On top of this, Hungary was forced to pay the victorious Soviet Union reparations accounting for up to 50% of Hungary’s budget. As a result, the government printed too much money to meet obligations, and hyperinflation ensued. The daily inflation rate from August 1945 to July 1946 was 207%, with prices doubling every 15 hours.

Yugoslavia, 1992-1994

The breakup of Yugoslavia during the Yugoslav Wars resulted in major economic tumult for the area that is made up by today’s Serbia and Montenegro. The new state tried to retain the bureaucracy of old Yugoslavia, which was massive and expensive, leading to a significant national deficit. In an effort to address its debts, the central bank printed too much money which resulted in hyperinflation for nearly two years. From April 1992 to January 1994, the daily inflation rate was 65%, and prices doubled every 34 hours.

Zimbabwe, 2007-2008

Land reforms instituted by Zimbabwean President Robert Mugabe in 2000 and 2001 precipitated many years of economic decline for the southern African nation. The confiscation of white-owned farms and subsequent redistribution to indigenous African Zimbabweans resulted in a 50% collapse in economic output over the next decade. This pushed a large number of Zimbabwean workers overseas, further depressing economic output and shrinking the tax base. 

The government’s involvement in a civil war in the neighboring Democratic Republic of Congo exacerbated economic decline, and the country printed money in an attempt to fix its government spending problem. The country was consequently in the grips of a period of hyperinflation which lasted 19 months. The daily inflation rate was 98% and prices doubled every 25 hours.

The bottom line

Hyperinflation, or the skyrocketing of prices and devaluation of currency, is not a common phenomenon. The fact that it hasn’t happened in the U.S. doesn’t mean it can never happen. The historical examples demonstrate how much damage explosive rises in prices can cause.

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