Hyperinflation is a rapid and uncontrollable rise in prices of goods and services. Hyperinflation, is different from Inflation, in terms of magnitude and the speed with which prices rise. An economy is said to be facing hyperinflation when the monthly inflation rate exceeds 50% for a sustained period of time. At this rate, if cost of a product today is USD 100, it would cost USD 12,975 after an year.
How is Hyperinflation Bad?
If prices begin to increase at this rate, people will start storing/ hoarding goods so they don’t have to spend too much in the times to come. This would lead to shortage of goods available. Recall, how when the COVID-19 pandemic had struck in 2020, people had hoarded rolls of tissue papers, masks, sanitizers, and non-perishable food items leading to a major shortage in the country and a sudden increase in prices of these goods*.
Since prices are rising rapidly, each 100 dollar bill that you hold, will be able to get you fewer things. Thus, money begins to lose its purchasing power. As the value of money reduces, the financial worth of people holding it also goes down significantly.
With this, people would also want to spend money today, instead saving it in their bank accounts for tomorrow (as the purchasing power of eroding). As they withdraw their deposits from bank, to make the purchases, the banking sector would also face scarcity of funds and would thus get negatively impacted.
In some instances of hyperinflation, it has been seen that money has become so worthless, that hawkers have made handbags out of it or people have simply thrown away the currency notes!
What Causes Hyperinflation?
Hyperinflation occurs mostly as a result of extreme increase in money supply. When an economy is facing a period of low or negative growth, the central bank usually tries to increase the money supply by encouraging commercial banks to increase lending to consumers and businesses. It is expected that this increase in lending would lead to greater production and spending. However, when this increase is money supply is not accompanied with a desired increase in production of goods and services, prices of goods begin to rise rapidly.
This is because with increase in money supply, people have more disposable income to spend, but with production not catching-up, the demand for goods and services becomes higher than the supply, people are willing to pay more, thus pushing up the prices.
In the past, hyperinflation has also occurred in times of war, which has resulted in a loss of confidence in the currency.
Where has Hyperinflation Occurred Before?
The most recent example of hyperinflation is that of Zimbabwe, where during the financial crisis of 2008, country’s inflation rate rose to 79,600,000,000% (79.6 billion %) in November. This roughly translates to a daily inflation rate of 98%. As a result of this, Zimbabwe switched to using other currencies like US dollars. Bringing down these levels of inflation in Zimbabwe has been tough. As recently as February 2021, inflation in Zimbabwe was estimated to be at 322%. Inflation in Zimbabwe has come down to double digits since July 2021, reaching 60.6% in January 2022**.
In the past, other countries, for example, Argentina, Bolivia, Brazil, Chile, Peru, former Yugoslavia, Uruguay, Venezuela have also faced hyperinflation.
*While this is not an example of hyperinflation, this is a classic example of sudden hoarding of goods by consumers
**Data from Trading Economics