Understanding Hyperinflation

Introduction

Hyperinflation is a term to define rapid, extreme, and out-of-control price upsurges in an economy. While inflation is a measure of the pace of rising prices for goods and services, hyperinflation is swiftly intensifying inflation.

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 occurs when prices have risen by more than 50% per month over a period of time. For comparative purposes, the U.S. inflation rate as measured by the Consumer Price Index (CPI) is typically less than 2% per year, according to the Bureau of Labor Statistics. The CPI is merely an index of the prices for a selected basket of goods and services. Hyperinflation causes consumers and businesses to need more money to buy products due to higher prices.

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.

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.

Hyperinflation can cause a number of consequences for an economy. People may hoard goods, including perishables such as food because of rising prices, which in turn, can create food supply shortages. When prices rise excessively, cash, or savings deposited in banks decreases in value or becomes worthless since the money has far less purchasing power. Consumers' financial situation deteriorates and can lead to bankruptcy.

Also, people might not deposit their money, financial institutions leading to banks and lenders going out of business. Tax revenues may also fall if consumers and businesses can't pay, resulting in governments failing to provide basic services.

Venezuela’s Economic crisis

Venezuela has been gripped by economic collapse and political crisis. After years of financial strife, hyperinflation has reached a devastating level, with the IMF estimating that inflation will reach 10 million percent in 2019. The crippling of a once affluent, oil-rich nation was exacerbated by plummeting oil prices in 2014 — its hard currency lost significant value with the onset of the US fracking industry.

Venezuela has the largest known oil reserves in the world and yet the Venezuelan bolívar has tanked, rendering it essentially worthless. In August 2018, Venezuela's president Nicolas Maduro devalued the currency, removing five zeros off in an effort to instil stability. Professor and Economist Steve Hanke from John Hopkins University called the move a "scam" at the time on Twitter, adding: "Redenomination will be like going under the knife of one of Caracas’s famed plastic surgeons. Appearances change, but, in reality, nothing changes." Months on, the currency facelift has done nothing to ease an economy in freefall.

Hyperinflation in Zimbabwe

In 2008, Zimbabwe had the second highest incidence of hyperinflation on record. The estimated inflation rate for Nov 2008 was 79,600,000,000%. That is effectively a daily inflation rate of 98.0. Roughly every day, prices would double. It was also a time of real hardship and poverty, with an unemployment rate of close to 80% and a virtual breakdown in normal economic activity. The hyper-inflation was caused by printing money in response to a series of economic shocks.

In tomorrow’s post we will take a look at how cryptocurrencies feature in these types of economic situations.