Understanding Hyperinflation

Hyperinflation is a term to describe rapid, excessive, and out-of-control general price increases in an economy. While inflation measures the pace of rising prices for goods and services, hyperinflation is rapidly rising inflation, typically measuring more than 50 per cent per 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 Georgia.

Inflation is measured by the Bureau of Labor Statistics using the Consumer Price Index (CPI) to measure the dollar's purchasing power. The CPI is an index of the prices for about 94,000 commodities and services; around 8,000 rental housing unit quotes; and prices for airline fares, apparel, household goods, prescription drugs, used automobiles, and postage. Central banks generally control the circulating supply of money. In circumstances that historically warrant an increase in the money supply—like a recession or depression—central banks can increase the amount of money circulating. The intent behind this action is to encourage banks to lend and consumers and businesses to borrow and spend.

However, if the increase in money supply is not supported by economic growth—as measured by gross domestic product (GDP)—hyperinflation can result. If GDP—the measure of an economy's production—isn't growing, businesses raise prices to boost profits and stay afloat.

Because consumers have more money, they pay higher prices and feed inflation. If economic output continues to stagnate or shrink and inflation keeps rising, companies charge more, consumers pay more, and the central bank prints more money. A cycle of increasing inflation rates occurs, leading to hyperinflation.

Demand-pull inflation is a scenario in which aggregate demand becomes too high for aggregate supply. This increases prices rapidly because there are not enough goods and services available to meet the increase in overall demand from consumers and businesses. Hyperinflation can cause several adverse consequences. People may begin hoarding goods, such as food. In turn, there can be food supply shortages.

When prices rise excessively, money decreases in value because inflation causes it to have less purchasing power. Less purchasing power means consumers spend more to buy less. As a result, they have less money to pay bills and fewer dollars to use on essential items.

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