What is hyperinflation?
October 31, 2023 6 min read
Prices tend to rise over time. This increase is called inflation. And a modest amount of inflation can actually be good for an economy. However, you don’t want too much of a good thing. And when prices start rising uncontrollably, things can turn very bad quickly. This is when inflation becomes hyperinflation.
Read on to learn more about hyperinflation, how it differs from inflation, and its causes and effects.
Hyperinflation is when the cost of goods and services increases at an extraordinary pace, such as more than 50% every month.
A hyperinflationary period generally results from a significant event, such as a war, natural disaster or political uprising, that leads the government to print money to cover a deficit.
Although hyperinflation is rare, it can be self-perpetuating and require extreme measures to stop once it starts.
Inflation describes the general increase in the cost of goods and services over time, and hyperinflation is when that happens at a much faster rate.
There’s no precise point when inflation turns to hyperinflation. The International Accounting Standards Board defines hyperinflation as a 100% inflation rate over a three-year period. And economists Carmen Reinhart and Kenneth Rogoff describe it as an annual inflation rate of 500%. However, many people use the definition that Philip Cagan, an economist at the National Bureau of Economic Research, wrote in his 1956 dissertation: a monthly inflation rate that exceeds 50%.
Suppose you go to the grocery store and buy $100 worth of groceries. Then, the next month, you have to spend $150 to get the same groceries. That would be a 50% inflation rate and an example of hyperinflation.
Inflation vs. hyperinflation
A small amount of inflation is relatively common and even desired. The Federal Reserve sets a target to keep inflation at 2% annually in the U.S. A low and steady inflation rate can help an economy, as it encourages people to spend money but also offers the assurance that their savings will be useful in the future.
Very low inflation, or deflation—also known as negative inflation—can be harmful because people might not want to spend money if prices drop the longer they wait. However, if no one is spending money, companies might not have enough income to pay their workers or produce more goods.
On the other hand, when inflation is too high, you might want to spend your money as quickly as possible and buy things before prices go up. However, that can lead to shortages that drive prices up even faster.
Hyperinflation takes this to such an extreme that sometimes the money you have loses value so quickly that you don’t want to save it.
What causes hyperinflation?
Generally, hyperinflation occurs when the government prints money to cover its expenses faster than the country’s economy is growing. Often, a period of hyperinflation is spurred by a significant event, such as a war or natural disaster, that leads to a budget deficit. Governments that can’t or don’t want to make up the deficit through taxation might order their central bank to print money instead.
The growing money supply decreases the currency’s value. In turn, people spend their money faster, knowing that the longer they hold onto it, the less they can buy. But the spending further decreases supplies, leading prices to rise even faster. The cycle continues as the government has to print even more money to cover its deficits and there’s more pressure on people to spend money quickly.
What are the effects of hyperinflation?
It can be extremely difficult to live with hyperinflation, and you might see or experience the impact in different ways, including:
Shortages: People might buy products, especially items that won’t go bad, before prices increase. But hoarding can lead to shortages, which could also result in rising prices.
Non-currency savings: Since keeping money in a savings account no longer makes sense because of its loss of value, people might try to buy alternative assets to keep their savings safe. These could include precious metals, gems or foreign currencies.
Black markets: Bartering could become the standard as both parties would rather trade products or services than accept cash.
Lack of credit: You might not be able to get a loan because creditors don’t want to lend money since the amount you repay could be worth so much less than they loan you today.
Loss of tax revenue: Due to the devaluation of money, revenue from taxes is worth less, which affects government revenue on the whole as well as a government’s ability to provide services.
The effects can be dire, especially if the government can’t quickly reverse course and bring inflation down. People may struggle to afford food, rent, utilities or medicine, and the government can’t offer relief if it can’t buy imports on global markets. In some cases, people will uproot their lives and leave the country out of desperation.
Examples of hyperinflation
Hyperinflation is relatively rare, and there have been fewer than 60 examples of hyperinflation worldwide since 1920. A few notable and timely examples are:
Hungary: One of the worst cases of hyperinflation occurred in Hungary in 1945 and ’46. The inflation rate was so high that prices doubled about every 15 hours—imagine the money you earned for a day’s work being worth half as much by the next morning.
Venezuela: In more recent times, Venezuela started a hyperinflationary period in 2017, due in part to decreased oil revenue and President Maduro’s policies. There are estimates that year-over-year inflation was in the hundreds of thousands, if not millions, of percent. Various reforms have helped reduce the inflation rate but many people still struggle to make ends meet.
Argentina: Argentina experienced hyperinflation in 1989 and ’90 and is again struggling with hyperinflation in 2022 and ’23, with annual inflation rates over 100%. It’s an ongoing crisis that makes working, saving and affording everyday necessities difficult.
Responses to hyperinflation
Stopping a hyperinflationary cycle can require drastic measures that could make things temporarily worse for people. In the past, governments have responded to hyperinflation by raising taxes, cutting government spending, setting price caps, privatizing government industries, tying the currency’s value to a foreign currency and even completely changing the country’s currency.
These can be difficult to live through, and it might take years for people to recover from a hyperinflationary period and its aftermath.
How to prepare for hyperinflation
There’s little you can do to prepare for hyperinflation, and the fixes will largely depend on government rather than individual responses. To make matters worse, the actions you might take to protect yourself—such as quickly buying products to store at home—can make the problem worse overall.
However, you can take steps to protect yourself from moderate inflation rates, such as:
Diversifying your investments: Consider how inflation could affect your returns and research investments that might not be as impacted by inflation, such as real estate or precious metals.
Reconsider major purchases: You’ll want to think carefully before spending a lot of money or taking out a large loan. If rates go back down sooner rather than later, you might be better off waiting.
Consider delaying paying off low-interest debt: It might make sense to make only minimum payments on debts with low and fixed interest rates. If inflation persists, the money you’ll use to pay them off will be worth less in the future. And even if inflation doesn’t persist, you still might be able to earn more in a high-yield savings account than you’re paying in interest.
Hyperinflation in a nutshell
Hyperinflation is when a country experiences a fast and high rate of inflation—often defined as at least 50% per month. The quickly rising prices can wipe out individuals’ savings, lead to massive shortages and leave a country’s economy in shambles.