What is Hyperinflation?

What is Hyperinflation?

Inflation is when the price of goods and services rises substantially within a specific period of time, but hyperinflation is the rapid increase of inflation. Inflation can sometimes build on top of itself, which only increases the rate at which prices rise. Hyperinflation is when these price increases spiral out of control as companies and individuals need more money to buy the same amount of goods and services as before. Hyperinflation tends to be rare, but it has occurred several times throughout recent history. Learn about how hyperinflation can affect the market and your finances.

Related: Is It Time to Talk About Hyperinflation? – Featuring Jared Dillian and Maggie Lake

What Is Hyperinflation?

Hyperinflation occurs when the rate of inflation rapidly increases within a country’s economy. Inflation tends to occur naturally over time. It represents a decrease in customer purchasing power as the value of a particular currency falls. When the economy is healthy, inflation usually occurs at a steady rate. For example, the Consumer Price Index (CPI) in the United States tracks the price of commonly used goods and services. The CPI shows an average annual increase of around 2%.

Hyperinflation is when prices increase dramatically within a short period of time, usually by 50% or more per month. This means prices doubled in the last month. In some cases, inflation may be recorded daily, increasing by 10% to 15% a day. This level of inflation is considered unsustainable, and if wages don’t increase at the same pace as inflation, many people will lose their ability to pay for everyday essentials, like food, water, fuel, housing, and transportation. Businesses may also lose capital or see a dramatic decline in profits, which can lead to foreclosure and bankruptcy.

During inflation, goods and services often become scarce as companies struggle to pay for supplies and labor to make their products. Some individuals may start to hoard goods, including essential resources like food and water. Financial institutions often run out of money and capital to lend to companies and individuals, which further limits economic activity. Interest rates tend to go up during periods of hyperinflation to reduce demand for products and services.

What Causes Hyperinflation?

Printing Too Much Money

The country’s central bank controls the supply of money. When economic growth slows and the economy contracts, it can lead to a recession or depression that can last months or years at a time. Many people may lose their jobs or run out of savings. During times of crisis, the government will often print off more money to help consumers and businesses access capital. This can increase spending and spur economic growth, but it can also lead to hyperinflation. Printing off more money reduces the value of the currency, which can lead to higher prices.

Declining Confidence in the Economy

Consumers and businesses may also lose faith in the country’s economy or the government’s ability to regulate the flow of currency during times of crisis, such as war, a global health crisis, or a natural disaster. Investors will typically start moving money out of the country if they feel the country is headed for a depression or recession. Other countries will then charge a risk premium to make up for the added risk of doing business with companies and individuals from the affected country. People will eventually lose money by exchanging their home currency for currency in another nation. The home country’s currency will start to lose value, and the government may decide to implement capital controls to prevent investors from taking money out of the country.

Consumers and businesses may start to lose confidence if they get the sense that the government doesn’t have the public’s best interest at heart. There have been several examples of hyperinflation throughout history. For example, Yugoslavia experienced hyperinflation during the 1990s after it was discovered that one of the country’s leaders had the country’s central bank issue $1.4 billion in loans to his business partners and associates instead of printing money to support economic growth.

How to Prepare for Hyperinflation

If you expect the price of goods and services to rise dramatically, keep your savings in a high-return savings or investment account. Your money will quickly lose value during times of hyperinflation but getting a return on your savings can help you fend off the worst effects of hyperinflation. You likely won’t get a high enough rate of return on your savings to overcome the cost of inflation. Even if your savings accumulate at 10% a year, it won’t be enough to make up for the 50% jump in prices.

You may want to move your money out of the country during times of hyperinflation by exchanging your money for another country’s currency or investing in stocks and bonds in another country. However, you will have to pay a risk premium if your country’s currency is dropping in value. Consider investing your money in another country before the local government issues capital controls.

What to Buy Before Hyperinflation Hits

Precious items like gold, silver, fuel, and even cryptocurrency will likely regain their value once the economy has recovered. These commodities will also have value in other countries. Buying items that are naturally rare or precious will likely help you overcome the effects of hyperinflation.

RELATED CATEGORIES: Macro