Hyperinflation Definition and Causes

What is Hyperinflation?

Hyperinflation is excessive inflation. It technically happens when prices for goods and services increase by more than 50% per month. What’s normal? Until recently, the U.S. inflation rate was averaging about 2% per year.

In a hyperinflationary environment, the cost of a gallon of milk, for example, could go from $2.50 to $3.75 in just a few weeks. Over the course of a year, the price of that same gallon of milk could rise to $15 or more.

What Causes Hyperinflation?

Hyperinflation is usually triggered by a rapid increase in a country’s money supply, coupled with a phenomenon called demand-pull inflation.

Money Supply

If a government prints too much money to help lift up its struggling economy, the real value of its currency weakens and prices go up. This is common during depressions, wars or periods of major social conflict, when governments need to cover excessive spending or encourage banks to lend to consumers so they will spend money and the economy will grow.

Demand-Pull Inflation

When people see prices skyrocketing, they tend to hoard goods so they don’t have to pay even more in the future. This restricts supply and pushes prices even higher, leading to demand-pull inflation. If supply remains low, people will justify paying higher and higher prices to get what they need.

Read More: Let’s Talk About Inflation (Again)

Effects of Hyperinflation

Unmanaged hyperinflation can destroy an economy.

As currency loses its value, people’s cash savings accounts dry up and may even become worthless compared to what they once were. Some people will hoard durable goods, such as appliances and cars, since their value is ever-increasing.

Not only do consumers lose confidence in their government, but businesses do too. Although businesses charge higher prices, it’s because the costs to operate are increasing. Importing goods from other countries becomes too expensive, and some businesses don’t survive. This can lead to a rise in unemployment.

However, there are some groups who can benefit from hyperinflation. Firstly, borrowers will likely see their debt shrink or completely disappear in a matter of weeks as the value of currency falls (on the flip side, lenders may go bankrupt when this income stream dries up).

The second group that may benefit from runaway inflation is people who do business outside of the country and earn foreign currency, such as exporters, or investors in foreign currency.

Example of Hyperinflation

One of the most severe periods of hyperinflation in history happened in Hungary after World War II. The conflict destroyed much of the country’s infrastructure and limited its production capability. Hungary was also required to pay war reparations.

To cover its debts, rebuild, and stimulate the economy, the Hungarian government turned to printing money. Within a year, inflation was a runaway train — prices were doubling every 15 hours.

By July 1946, economists estimated the inflation rate in Hungary hit a staggering 41.9 quadrillion percent per month. Real wages plummeted and creditors folded, sending people into poverty.

The Hungarian government eventually implemented a plan to stabilize prices, in part through tax reform and the introduction of a new currency.

Other historic episodes of hyperinflation include Yugoslavia in the 1990s, where the daily inflation rate hit 65%, and Zimbabwe in the mid-2000s, where prices nearly doubled every day. Zimbabwe eventually abandoned its currency and transitioned to the U.S. dollar.

Our Take

The annual inflation rate in the U.S. is around 8% as of May 2022. While that’s four times higher than the target inflation rate set by the Federal Reserve, it’s a far cry from hyperinflation.

Still, there are ways you can protect your money during periods of relatively high inflation so you don’t lose too much purchasing power. Strategies include investing in stocks, Treasury-Inflation Protected Securities (TIPS), and alternative assets like real estate and commodities. You may also reconsider your debt payoff plan, since inflation can work in your favor as a borrower.

Speak with a financial advisor to see how inflation can affect your portfolio and what steps you can take to protect your wealth.

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Author is not a client of Personal Capital Advisors Corporation and is compensated as a freelance writer.

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