What is Hyperinflation?
Hyperinflation occurs in a country’s economy when the prices of goods and services rise in excess of 50% per month.
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How Does Hyperinflation Work in Economics?
In economics, the term “hyperinflation” is defined as a period in which the prices of all goods and services in a particular country rise dramatically.
If a country’s economy is in a state of hyperinflation, the central government (or the applicable governing party) has essentially lost control of the economy’s rate of inflation.
The cause of hyperinflation is a disproportionate rise in the money supply that far exceeds the expectations of consumers, companies, economists, and the government.
The significant uptick in the money supply, when not supported by enough growth in the economy, can cause seemingly exponential growth in inflation.
Hyperinflation is frequently preceded by the central government printing a substantial amount of money in an attempt to increase the current level of economic activity.
The drawback to the government flooding the economy with cash is that the sudden increase in the amount of money in circulation results in the country’s currency declining in value, thus causing a rise in the price of goods and services.
Usually, these negative consequences of the central government printing more money are not apparent to everyday consumers until the printing is either gradually pulled back or halted.
What Causes Hyperinflation?
If hyperinflation is present in a country’s economy, one notable change in consumer behavior is the increased hoarding of goods, i.e. stockpiling of everyday essentials.
When the outlook on the economy is negative, consumers expectedly increase their near-term spending to accumulate required goods in anticipation of a long-term decline in overall spending (and a major economic collapse).
The long-term consequences of hyperinflation are more expensive pricing of goods, more closures of businesses, and scarcity of daily goods as the government struggles to fix the collapsing economy.
Often, consumers will lose their life savings from currency devaluation, where the country’s currency of exchange loses a significant percentage of its original value.
In addition, banks and other institutional lenders will end up in bankruptcy from the value of their loans becoming near worthless, reducing the amount of credit available in the country and the amount of money in circulation.
To make matters even worse, consumers eventually will stop depositing their money at financial institutions, placing even more downward pressure on banks and lenders.
A country’s currency during a period of hyperinflation plummets in value, particularly overseas in foreign markets, and domestic importers also produce less revenue (and profits) as the cost of foreign goods becomes too high for their business models to be sustainable.
From the perspective of foreign countries, the collapsing value of the country’s currency makes exports more affordable — but these beneficial savings are at the expense of the country experiencing hyperinflation.
Hyperinflation is characterized by increased prices, a devalued currency, more bankruptcies, less purchasing power among consumers, and shortages in goods like food.
