Hyperinflation vs. Inflation: An Overview
In the world of economics, inflation is a term that gets thrown around every time the price of certain goods or services goes up suddenly. But what is hyperinflation? Is it just an extreme form of inflation, or is it something else entirely? Here's a look at the two occurrences, how to identify them, and what they might mean for the economy overall.
- Inflation refers to an across-the-board rise in prices, afflicting either a specific industry or the economy as a whole.
- Hyperinflation is an extreme form of inflation in which the currency goes into a tailspin, dragging the economy with it.
- Periods of inflation and deflation are common in a healthy economy and can be modulated by central bank action.
- Hyperinflation is far less common than inflation and is usually the result of war or a major period of civil unrest.
Inflation refers to prices rising over time, either in a particular industry or throughout the entire economy. Put another way; it's what happens when a unit of currency is worth incrementally less than it was in the previous fiscal period.
Healthy economies will always have small fluctuations or constant low levels of inflation and deflation. Banks and other economic factors work to reduce these fluctuations as much as possible. The more successful the reduction, the more stable the economy.
Hyperinflation is an economically deadly and unnatural condition. It is a situation in which the value of the currency goes into a free fall. It may be worth 1:1 when compared to another currency one month, 50:1 against the same currency the next, and 2,000:1 the month after that.
For instance, near the end of the American Civil War, most Confederate supporters feared the war was already lost. The Confederate dollar, which had previously been almost on par with the U.S. dollar, suddenly dropped to a value of about 1,200:1. If the Confederate dollar had not fallen out of use entirely, it's likely that you'd see the ratio continue to rise until even a billion Confederate dollars could not purchase a U.S. Dollar.
Every time there is economic, civil, or governmental unrest, experts voice concerns about hyperinflation. Stable economies do not want to trade with unstable economies, so massive upheavals mean that investors and trade partners no longer want to trade in the currency that is viewed as unstable. It is most common during and after wars, particularly for the losing side.
Though some experts use the thumbnail of a 50% or greater price level increase per month, there is no set-in-stone definition for hyperinflation. There is no guideline for the duration of "official" hyperinflation. The use of the term usually hinges on the real-world effects of radical inflation, such as the sudden inability of median income earners to buy sufficient food or retain adequate housing. It is an extreme example of inflation, which economists agree appeared about 50 times worldwide in the last century.
A large swing in the price of one currency vs. another does not have to indicate hyperinflation; in some cases, it speaks to severe inflation, which would greatly hurt the economy, but fall short of the devastating impact of hyperinflation.
Too much inflation is never a good thing, but significant inflationary levels can exist without being considered hyperinflation. For instance, if the U.S dollar suddenly shifts from being worth twice as much as the Canadian dollar to being worth half as much as the Canadian dollar, this is not generally considered hyperinflation. Rather, it would be considered severe inflation and could cause significant economic instability. However, it is unlikely to completely decimate the economy as a whole.
While hyperinflation is on the minds of investors and economists in times of economic uncertainty, it is an extreme that occurs only occasionally. Investment in precious metals, multiple currencies, or critical commodities may help protect against potential hyperinflation.