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. 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 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. Use of the term usually hinges on the real-world effects of the 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.

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 moves from being worth twice as much as the Canadian dollar to being worth half as much, it is not generally considered hyperinflation. It is severe inflation and can cause significant economic instability but is unlikely to completely decimate the economy as a whole.

While hyperinflation is constantly on the minds of investors and economists in times of economic uncertainty, it is an extreme. Investment in precious metals, multiple currencies or critical commodities may help protect against potential hyperinflation.

  1. What are the key differences between stagflation and hyperinflation?

    Learn the differences between stagflation and hyperinflation and the types of monetary policies used to take corrective action ... Read Answer >>
  2. Should investors worry about the budget deficit?

    Understand the difference between government deficits and government debt, and learn why these figures can be significant ... Read Answer >>
  3. How does inflation affect the exchange rate between two nations?

    Countries attempt to balance interest rates and inflation, but the interrelationship between the two is complex and can influence ... Read Answer >>
  4. How does inflation affect fixed-income investments?

    Learn about the ways inflation can harm fixed-income investments. Find out how to monitor the impact of inflation using common ... Read Answer >>
Related Articles
  1. Investing

    5 Tales Of Out-Of-Control Inflation

    Hyperinflation can make a $1,000 bill look like chump change.
  2. Insights

    A Primer On Inflation

    Inflation has a negative connotation, but is it all bad or does it offer some tangible benefits?
  3. Insights

    The Consumer Price Index: A Friend To Investors

    As a measure of inflation, this index can help you make key financial decisions.
  4. Trading

    5 Failed Currencies And Why They Crashed

    In light of speculation that the euro is in trouble, we look at currencies that were once widely used but are now defunct.
  5. Investing

    What Is Wrong With Gold?

    Despite its historic and symbolic appeal, this metal is simply a commodity. Here we explore its meaning as an investment.
  6. Insights

    How Currency Works

    Currency offers key advantages over economies based on direct trade, including a broader market for sellers' goods and services and transport ease.
  7. Trading

    How CPI Affects the Dollar Against Other Currencies

    The Consumer Price Index is a broad measure of inflation, and inflation can have a dramatic impact on a currency's value against rival currencies.
  1. Hyperinflation

    Hyperinflation is extremely rapid or out of control inflation. ...
  2. Inflation

    The rate at which the general level of prices for goods and services ...
  3. Inflation Accounting

    Inflation accounting is a special accounting technique used during ...
  4. Inflation Trade

    An inflation trade is an investing scheme or trading method that ...
  5. Purchasing Power

    The value of a currency expressed in terms of the amount of goods ...
  6. USD

    The USD is the abbreviation for the U.S. dollar.
Hot Definitions
  1. Liquidity

    Liquidity is the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's ...
  2. Federal Funds Rate

    The federal funds rate is the interest rate at which a depository institution lends funds maintained at the Federal Reserve ...
  3. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  4. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  5. Entrepreneur

    An entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture.
  6. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
Trading Center