What Is Hyperinflation?
Hyperinflation is the rapid and untrollable acceleration of prices over a period. Economists tend to focus on a nation’s consumer prices rather than wholesale prices, and the typical measure of inflation is the consumer price index.
Hyperinflation technically occurs when the month-on-month inflation rate increases by 50% or higher, and it ends when the rate drops below 50% for a year. A 50% inflation rate for each successive month in 12 months would translate into a 12,875% rate over that 12-month period.
What Causes Hyperinflation?
There can be many underlying causes contributing to sudden increases in prices, but two key factors in hyperinflation are demand-pull inflation and a nation’s money supply.
Demand-Pull Inflation
When demand greatly exceeds supply, prices for goods and services can increase rapidly and suddenly, leading to hyperinflation. A shock to the supply chain, for example, could cause disruptions in the manufacturing of goods, leading to higher prices for goods that are already produced and for those that are still being produced.
Money Supply
An expansion of the amount of money in a nation’s economy that is not supported by strong growth or prudent financial management can lead to a decline in the value of the nation’s currency. For example, surpluses in a country’s financial budget and current account could underpin its creation of money to further boost economic growth. On the other hand, pumping more money into the economy while experiencing twin deficits could lead to currency losing value.
Underpinning Factors
Hyperinflation can be unpredictable, and there can be a multitude of underlying factors that can contribute to a rapid rise in prices: the aftermath of human conflict or war, political instability, the transitioning from one economic system to another, deteriorating economic and financial conditions, or a depreciating currency.
How Does Hyperinflation Affect the Economy?
Hyperinflation can devastate a nation’s economy. High prices make it difficult for people to keep up with the cost of living, and the declining value of money means that they are likely to pay more for the same goods and services in the future. For example, hyperinflation at a 50 percent rate in one month would mean that goods and services cost 50% more on average than they did the prior month. This would also mean that an hourly worker would have to work 50% more to keep up with the price increases, assuming their wage remained the same.
In cases of hyperinflation monetary policy makers would have to consider raising interest rates aggressively to keep up with the hyperinflationary price increases. This sort of extreme tightening, however, could be devastating to a nation’s economy, stunting growth and setting the stage for recession.
Examples of Nations Facing Hyperinflation
The U.S. was close to experiencing hyperinflation following the Revolutionary War in the late 1700s and in the years after the Civil War of 1861–1865, but the monthly inflation rate never exceeded 50%. France was reported to be the first nation to experience hyperinflation in modern history, during its 1789–1799 revolution.
The table below lists several examples of hyperinflation.
How Does Hyperinflation Affect Financial Markets?
The tightening of monetary policy that would likely occur in response to hyperinflation would damp investment in the stock market. Publicly traded companies, for example, would have to pay more for raw materials, and that would lower their revenue and net income.
A nation’s currency would also come under pressure, depreciating against other currencies in the foreign exchange market. At the same time, though, a weaker currency could make the country’s exports cheaper for foreign buyers.
