What is Hyperinflation and Differences with Inflation

Hyperinflation is the term that describes and measures rapid and excessive price increases, such as to determine “extreme” inflation.

The phenomenon of hyperinflation is therefore distinguished from a more normal increase in prices, because the leap is really large, with growth rates above 50% month on month.

Inflationary manifestations manifest themselves in many different ways. For example, with “creeping inflation” we mean an increase of less than 10%, but prolonged and with the typical expression of financial jargon “galloping inflation” we refer to the rapid and unstoppable increase in prices.

The focus on price movements has increased since 2022, when the whole world was hit by a perfect storm between post-Covid recovery, war in Ukraine and high interest rates.

At the time, the World Bank recalled how a series of common factors were contributing to the increase in inflation. Skyrocketing energy bills caused in part by the war in Ukraine, uncontrolled fuel price increases, not to mention soaring global food prices and rising commodity costs had raised hyperinflation fears.

However, even with the price spike felt in Europe and Italy, hyperinflation did not occur. What exactly is it? Below is hyperinflation meaning and examples.

Hyperinflation meaning and definition

In short, the term hyperinflation means:

a rapid and uncontrolled increase in prices and inflation in an economy over a period of time, usually at rates of more than 50% each month.

Hyperinflation can cause prices of essential goods such as food and fuel to rise, as demand outstrips supply.

Hyperinflation scenarios are usually rare, but when they start they can spiral out of control.

Given its “extreme” nature, hyperinflation is not without consequences.

The Impact of Hyperinflation

In such a context, for example, people may start hoarding goods such as food. As a result, food shortages may occur.

This practice also causes a vicious cycle: as prices rise, people try to get more goods for the future, in turn creating more demand and further increasing prices. If hyperinflation continues unabated, it almost always causes a major economic collapse.

Furthermore, money loses value when prices rise too high because inflation reduces its purchasing power. Lower purchasing power means that consumers spend more to buy less and have less money to pay bills and use for essential items.

Not only that, severe hyperinflation can cause the national economy to shift to a barter economy, which can significantly affect business confidence. It can also destroy the financial system, as banks become unwilling to lend money.

People may also not deposit their money in financial institutions, causing banks and credit institutions to close. Tax revenues can decline if consumers and businesses fail to pay, resulting in governments failing to provide essential services.

What causes it?

A variety of factors can trigger hyperinflation.

Typically, a very rapid growth in the money supply can cause this extreme jump in prices. For example, a government that prints money to pay for its expenses puts money into circulation that can be seen as excess.

Demand-pull inflation can also cause hyperinflation. Hyperinflation occurs when a surge in demand exceeds supply. This rapidly increases prices, because there are not enough goods and services available to satisfy the overall demand from consumers and businesses.

Differences between hyperinflation and inflation

Inflation and hyperinflation are economic phenomena related to the increase in prices, but they differ in intensity and consequences.

In short, inflation means:

a general and gradual increase in the prices of goods and services in an economy.

It is measured with indices such as the CPI (Consumer Price Index). It is considered normal if contained within 2-3% per year, and can even be positive for the economy. It can be caused by factors such as increased demand, rising production costs, restriction of the supply of goods or raw materials, expansionary monetary policies.

Different, however, as already explained, is the phenomenon of hyperinflation which produces an extreme and rapid increase in prices, often exceeding 50% per month. It leads to the devaluation of the currency, loss of confidence in the economy and collapse of purchasing power.

Real case studies

There are numerous examples of hyperinflation in history. One of the most famous occurred in Germany in the 1920s.
From 1914 onwards, an unfavourable economic situation occurred which saw the abandonment of the so-called “gold standard” (the gold system), in order to finance the war. The ability to convert gold into money created a monetary availability equal to the gold kept in the reserves of the central bank, which led to a strong devaluation of the mark.

By 1920, the cost of living was already nine to ten times higher than in 1914, and the end of the conflict against the Weimar Republic, with the heavy taxation to which it was subjected, led Germany to print more money. On November 15, 1923, at the exchange rate, 4,200 billion marks were needed to buy one dollar.
From that period, we have tragic photographs of the population carrying their money in a wheelbarrow to go and buy basic necessities.

Moving to more recent times, in the early 1990s, Yugoslavian leader Slobodan Milosevic plundered the national treasury, pushing the central bank to issue 1.4 billion dollars in loans to its affiliates.
The former Yugoslavia, already suffering from an inflation rate of over 76% per year, had to print excessive amounts of money to meet its financial obligations, giving rise to one of the most prolonged and severe hyperinflations in history.

In 1992, the Yugoslav currency, the dinar, had been devalued by 80% against the mark, the currency to which it was aligned. Private banks bought foreign currency at a higher rate than the official one to secure a hard currency; citizens had to return to bartering and the almost daily doubling of the inflation rate led to a percentage of this of about 313 million% per month.

Hyperinflation soon got out of control: the devaluation of the dinero prevented the government from financing the productive apparatus, leading them to total immobility, while the increase in demand for basic necessities and the lowering of the purchasing power of wages led to food shortages and a decrease in income of over 50%. The crisis was resolved with the replacement of the currency with the German mark, which led to a stabilization of the economy, not without suffering for the country.

Currently, the best-known example of hyperinflation is that of Zimbabwe. Begun in the early 2000s, due to the need to pay the debt to the International Monetary Fund, and seeing among its main causes the excessive printing of money to finance the war in Congo, the crisis led the local dollar to such a devaluation that, at the end of June 2008, 200 billion Zimbabwean dollars were needed for one US dollar.

Also in Zimbabwe, as in the case of the former Yugoslavia, the chosen solution to resolve hyperinflation was the currency exchange. In 2009, the government stopped printing money and adopted the South African rand and the US dollar as reference currencies, but the measure did not bring the hoped-for results, as it was affected by the readoption of the local currency in 2019, with a subsequent increase in inflation of 175%.

Original article published on Money.it Italy. Original title: Cos’è l’iperinflazione e differenze con l’inflazione