Hyperinflation is when the prices of goods and services rise more than 50% per month. At that rate, a loaf of bread could cost one amount in the morning and a higher one in the afternoon. The severity of cost increases distinguishes it from the other types of inflation. The next worst, galloping inflation, sends prices up 10% or more a year.
Causes of Hyperinflation
Hyperinflation has two main causes: an increase in the money supply and demand-pull inflation. The former happens when a country’s government begins printing money to pay for its spending. As it increases the money supply, prices rise as in regular inflation.
The other cause, demand-pull inflation, occurs when a surge in demand outstrips supply, sending prices higher. This can happen due to increased consumer spending due to a growing economy, a sudden rise in exports, or more government spending.1
The two often go hand-in-hand. Instead of tightening the money supply to stop inflation, the government or central bank might continue to print more money. With too much currency sloshing around, prices skyrocket. Once consumers realize what is happening, they expect continued inflation. They buy more now to avoid paying a higher price later. That excessive demand aggravates inflation. It’s even worse if consumers stockpile goods and create shortages.
Effects of Hyperinflation
The situation of hyperinflation leads to a devaluation of local currency in the foreign exchange market in comparison with other currencies. Due to the devaluation of the currencies, holders of the local currencies will minimize their holding and will switch to other stable currencies.
People will panic, and to avoid paying more in future, people will start hoarding. This hoarding will create a shortage of goods around the countries. The hoarding will start from durable goods, like jewellery, cars, etc. If the hyperinflation persists, people will start hoarding perishable foods, like vegetables, fruits as well.
People’s savings will be worthless. Moreover, lenders will go bankrupt as their loans will lose their value, and people will stop making deposits. Hyperinflation will hit the elderly and the poor the most.
Hyperinflation will lead to high unemployment and cause turmoil in the countries. The barter system will arise. Government revenue will fall, and it will thus print more money to counter this situation.
But that situation will create a vicious cycle of price increase in the market and encourage more printing from the Government. If hyperinflation will persist for a longer period, it will ultimately lead to an economic collapse.
Instances of hyperinflation in Germany
Germany has suffered hyperinflation during the 1920s. During World War I, the Germans increased money supply and paper marks were increased by four times, and then by a billion times till 1923. From the start of World War I till 1923, they issued 92.8 quintillion paper marks. As a result, the value of the mark decreased from four marks to a dollar to one trillion marks a dollar.
Initially, the increased stimulus increased the economic war. But when the war ended and Germany lost the battle, the allied forces imposed 132 billion marks on Germany as war reparations. Due to this reason, the money supply increased by a billion times, production in the country collapsed, and there was a shortage of goods in the whole country. Due to the excess money supply, and the supply was limited; prices of daily goods were doubling every 3.7 days. The inflation rate became 20% per day. This caused huge chaos, hunger, poverty in the country.
Although hyperinflation is a rare event, some people are still worried about its occurrence. Well, you can protect yourself from hyperinflation by following sound financial habits. You should have a well-diversified portfolio, including equities, bonds, commodities like gold and silver, and real estate.
However, governments have been taking appropriate measures to prevent inflation in the market and maintain stability in the market. However, it is always better to know about the worst situations that can happen in the future and be readily prepared by taking appropriate measures to tackle that situation.