Hyperinflation is a term to describe rapid, excessive, and out-of-control general price increases in an economy.

While inflation is a measure of the pace of rising prices for goods and services, hyperinflation is rapidly rising inflation, typically measuring more than 50% per month.

Whereas normal inflation is measured in terms of monthly price increases, hyperinflation is measured in terms of exponential daily increases that can approach 5% to 10% a day. Hyperinflation occurs when the inflation rate exceeds 50% for a period of a month.

Although hyperinflation is a rare event for developed economies, it has occurred many times throughout history in countries such as China, Germany, Russia, Hungary, and Argentina.

Hyperinflation can occur in times of war and economic turmoil in the underlying production economy, in conjunction with a central bank printing an excessive amount of money.

Hyperinflation can cause a surge in prices for basic goods—such as food and fuel—as they become scarce. While hyperinflations are typically rare, once they begin, they can spiral out of control.

Imagine the cost of food shopping going from $500 per week to $750 per week the next month, to $1,125 per week the next month, and so on. If wages aren't keeping pace with inflation in an economy, the standard of living for the people goes down because they can't afford to pay for their basic needs and cost of living expenses.

Why Hyperinflation Occurs

Although hyperinflation can be triggered by a number of reasons, below are a few of the most common causes of hyperinflation.

Excessive Money Supply

A depression is a prolonged period of a contracting economy, meaning the growth rate is negative. The response to a depression is usually an increase in the money supply by the central bank. The extra money is designed to encourage banks to lend to consumers and businesses to create spending and investment.

Loss of Confidence in the Economy or Monetary System

Companies selling goods within and outside the country demand a risk premium for accepting their currency by raising their prices. The result can lead to exponential price increases or hyperinflation. If a government isn't managed properly, citizens can also lose confidence in the value of their country's currency. When the currency is perceived as having little or no value, people begin to hoard commodities and goods that have value.

Examples of hyperinflation

There have been many examples of hyperinflation over the years. Some of the most notable include:

After defeat in World War I, Germany was saddled with debt and reparations that couldn't be paid with its papiermark currency. Germany's production capabilities were also damaged or occupied. At one point, inflation reached over 29,500% per month. Workers were paid with suitcases filled with money — but the suitcase itself might be worth more than its contents. 

Post-war Hungary similarly dealt with supply shocks as basic and production infrastructure was destroyed during the war. It was also saddled with reparation payments to the Soviets. The government continued to print money with higher denominations — there was a 100 quintillion pengo note at one point. And at the peak point of hyperinflation, prices doubled every 15 hours.

Venezuela is a contemporary example of a hyperinflationary period that began in 2016. Causes and inflationary rates are sometimes debated, but many Venezuelans struggle with food shortages and blackouts.

Hyperinflation can take virtually your entire life's savings, without the government having to bother raising the official tax rate at all.

Thomas SowellAmerican economist

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