What Is Hyperinflation?
Hyperinflation is a term to describe rapid, excessive, and out-of-control general price increases in an economy. While inflation measures the pace of rising prices for goods and services, hyperinflation is rapidly rising inflation, typically measuring more than 50% per month.
Although hyperinflation is a rare event for developed economies, it has occurred many times throughout history in countries such as China, Germany, Russia, Hungary, and Georgia.
- Hyperinflation refers to rapid and unrestrained price increases in an economy, typically at rates exceeding 50% each month over time.
- Hyperinflation can occur in circumstances affecting the underlying production economy, in conjunction with a central bank printing excessive money.
- Hyperinflation can cause a surge in prices for essential goods—such as food and fuel—as demand outpaces supply.
- While hyperinflation scenarios are typically rare, they can spiral out of control once they begin.
Inflation is measured by the Bureau of Labor Statistics using the Consumer Price Index (CPI) to measure the dollar's purchasing power. The CPI is an index of the prices for about 94,000 commodities and services; around 8,000 rental housing unit quotes; and prices for airline fares, apparel, household goods, prescription drugs, used automobiles, and postage.
Generally speaking, the Federal Reserve strives to maintain what it calls a healthy inflation rate of around 2% over the long term. A rate of inflation higher than 2% is considered high. Hyperinflation is an extreme case of inflation, not just a high inflation rate.
Hyperinflation occurs when prices have risen by more than 50% per month. Daily increases might approach 200% or more when hyperinflation occurs.
For comparative purposes, the U.S. inflation rate measured by the CPI has averaged about 2% per year since 2012, according to the Bureau of Labor Statistics.
For instance, imagine you always buy the same items at the grocery store. If the economy were experiencing a rising inflation rate of 5% per day, your grocery bill might rise from $500 per week to $675 the next week, to $911 per week the following week, and so on.
Causes of Hyperinflation
Although several circumstances can trigger hyperinflation, here are the most common causes of hyperinflation.
Excessive Money Supply
Central banks generally control the circulating supply of money. In circumstances that historically warrant an increase in the money supply—like a recession or depression—central banks can increase the amount of money circulating. The intent behind this action is to encourage banks to lend and consumers and businesses to borrow and spend.
However, if the increase in money supply is not supported by economic growth—as measured by gross domestic product (GDP)—hyperinflation can result. If GDP—the measure of an economy's production—isn't growing, businesses raise prices to boost profits and stay afloat.
Because consumers have more money, they pay higher prices and feed inflation. If economic output continues to stagnate or shrink and inflation keeps rising, companies charge more, consumers pay more, and the central bank prints more money. A cycle of increasing inflation rates occurs, leading to hyperinflation.
Demand-pull inflation is a scenario in which aggregate demand becomes too high for aggregate supply. This increases prices rapidly because there are not enough goods and services available to meet the increase in overall demand from consumers and businesses.
Hyperinflation is the product of many circumstances and poor monetary decision-making coming together.
Effects of Hyperinflation
Hyperinflation can cause several adverse consequences. People may begin hoarding goods, such as food. In turn, there can be food supply shortages.
When prices rise excessively, money decreases in value because inflation causes it to have less purchasing power. Less purchasing power means consumers spend more to buy less. As a result, they have less money to pay bills and fewer dollars to use on essential items.
Also, people might not deposit their money in financial institutions, leading banks and lenders to go out of business. Tax revenues may also fall if consumers and businesses can't pay, resulting in governments failing to provide essential services.
How to Prepare for Hyperinflation
It's critical to remember that hyperinflation doesn't happen very often, especially in developed countries where a central bank focuses on reigning in and controlling inflationary periods. However, there are some actions you can take to reduce the effects normal or high inflation have on your portfolio.
A balanced and diversified portfolio can help you reduce losses through inflationary periods. Commodities and real estate can reduce the adverse effects of inflation because they tend to increase in value during these times. Treasury Inflation-Protected Securities (TIPS) can hedge against rising inflation because the principal you have invested in a TIPS adjusts with inflation.
Mutual funds and exchange-traded funds that practice inflation swaps can also be used to combat the effects of inflation on your portfolio.
Real-World Examples of Hyperinflation
One of the more devastating and prolonged episodes of hyperinflation occurred in the former Yugoslavia in the 1990s. On the verge of national dissolution, the country had already been experiencing inflation at rates that exceeded 76% annually.
In 1991, it was discovered that the leader of the then Serbian province, Slobodan Milosevic, had plundered the national treasury by having the Serbian central bank issue $1.4 billion of loans to his cronies.
The theft forced the government's central bank to print excessive amounts of money to take care of its financial obligations. As a result, hyperinflation quickly enveloped the economy, erasing what was left of the country’s wealth and forcing its people into bartering for goods. The inflation rate nearly doubled each day until it reached an unfathomable rate of 313,000,000% per month.
The government quickly took control of production and wages, which led to food shortages. As a result, incomes dropped by more than 50%, and production crawled to a stop. Eventually, the government replaced its currency with the German mark, which helped to stabilize the economy.
Hungary experienced hyperinflation after World War II. At the peak of Hungary's inflation, prices were rising 207% per day.
In March 2007, Zimbabwe entered a period of hyperinflation that equaled a daily rate of inflation of 98% until early 2009. The country's hyperinflationary period began in 1999 after the country experienced several periods of drought and a following reduction in GDP.
As a result, the country was forced to borrow more than it produced, and the government began spending more. It increased taxes to pay bonuses to independence war veterans, became involved in a war in the Congo, and borrowed from the International Monetary Fund to improve development and living standards for citizens.
The government began printing money to pay for the expenses, causing an inflationary rise, and residents began to move to other countries to escape the economy. By 2010, nearly 1.3 million people had left, and the economy was in shambles.
What Will Happen If There Is Hyperinflation?
Hyperinflation doesn't occur without any indication. If economists see signs of hyperinflation—well before inflation reaches 50% in a month—the Federal Reserve will implement any monetary policy tools allowed to ensure it doesn't happen. In the past, Federal Reserve chair Paul Volcker raised rates to more than 21% to combat a rate of more than 14%—leading to two recessions before inflation came under control.
Will the U.S. Go Into Hyperinflation?
It is doubtful that the U.S. will experience hyperinflation unless economic circumstances become very dire. The Federal Reserve and government have many tools at their disposal that can prevent hyperinflation from occurring.
What Was the Worst Hyperinflation in History?
Hungary experienced hyperinflation from August 1945 to Jul 1946, with a daily inflation rate of 207%.
The Bottom Line
Hyperinflation is a scenario in which a county's inflation rate rises 50% in one month. It is a concern if a country is in a situation where it cannot afford to meet its obligations or experiences circumstances that affect its ability to produce goods and services. Thus, hyperinflation is not something that occurs very often. Nevertheless, hyperinflation has happened 43 times in 28 countries since 1796.