What is Hyperinflation?
Hyperinflation is a period where the prices in the Consumer Price Index (CPI) increase by more than 50% per month.
While a rate of inflation of 2% or less per year is common in a healthy economy, hyperinflation causes the price of goods to escalate uncontrollably, leaving consumers unable to afford basic goods.
Define Hyperinflation in Simple Terms
- Hyperinflation is often the consequence of a serious economic depression.
- During a depression, unemployment is high, and so consumers have less to spend on discretionary purchases.
- In the past, governments have responded to this by printing more money, thinking that an increase in the overall money supply will encourage both consumer spending and bank lending.
- However, if an increase in the money supply is not supported by growth in GDP, businesses must raise prices to stay afloat.
- With more money consumers pay the higher prices, leading to a vicious cycle of price increases.
- This can lead to the currency being quickly devalued.
Though hyperinflation is rare in developed countries, if it occurs, it can be catastrophic.
If a nation’s currency becomes devalued too quickly, they may have to abandon it and adopt a more successful currency, as was the case with the former Yugoslavia during the 1990’s.
The theft of funds from the government forced the nation to print more money to pay off its debts.
Inflation reached a peak rate of 300 million% per month, which effectively annihilated the value of their currency.
Eventually the nation had to adopt the German mark in order to stabilize the economy.