What Is Hyperinflation?

Hyperinflation – a sharp increase in prices and the amount of money in circulation, which leads to the devaluation of the national currency.

Unlike standard inflation, the amount of cash in circulation can increase many times over. According to some sources, a tenfold increase is enough to confirm hyperinflation, while others require a 50% monthly increase.

The consequences of hyperinflation include an economic downturn, increased demand for real assets such as real estate, gold bars, and similar items. Managing the situation becomes almost impossible.

What Is Hyperinflation

When Does Inflation Become Hyperinflation?

From an economic perspective, a price increase can be called hyperinflation if the cost of a consumer basket increases by more than 50% per month, and this rise continues in the country for more than three months. That is, literally within 2-3 months, money loses value several times.

Why Does Hyperinflation Occur?

This phenomenon occurs due to the issuance of a large amount of money (monetary emission). The government decides to start the printing press, demand exceeds supply many times, while people do not feel an increase in income.

Why do situations arise where the printing press must be operated at full capacity?

The state budget is made up of planned revenues and expenses for a certain period. The budget mainly receives revenue:

from taxes paid by businesses, companies, and ordinary citizens;
from the activities of banks and other financial institutions;
from the sale of goods and raw materials to other countries.

However, these are not the only sources of budget financing.

At the time of budget planning, there are no funds for the entire year in the treasury. Economists only forecast their inflow. If something goes wrong and the actual revenues turn out to be less than planned, it becomes impossible to maintain the planned level of funding. In this case, the government must find ways to cover the budget deficit, and often this problem is solved through monetary emission.

Here are the most prominent examples of covering the country’s budget with the help of the printing press, which lead to hyperinflation:

Decline in export prices. When preparing the budget, the cost of goods and raw materials is considered at the time of document preparation. The volume of sales is also predicted. If for some reason the price of raw materials or goods starts to fall significantly or the sales volume decreases, there will not be enough money in the budget.

Warfare. The state spends huge sums on weapons and military maintenance. However, these costs cannot be planned in the budget, as the start of war is usually unexpected. Sometimes, the available budget funds are not enough to conduct military operations, and then money is printed in large quantities.

Business outflow. The shutdown of major companies leads to a reduction in tax revenue to the budget. When it comes to small businesses, their collapse does not affect the country’s economy, but the departure of large enterprises can lead to hyperinflation.

What Are the Consequences of Hyperinflation?

Hyperinflation leads to a general decline in production, the devaluation of savings, and the complete collapse of the financial system in the country. In addition, hyperinflation affects the financial position of citizens.

With the previous salary amount, a person can buy several times fewer goods and services. Many companies go bankrupt, leading to unemployment. As a result, the number of poor people increases, and they have to buy only essential products to survive in this situation. The longer hyperinflation lasts, the more severe its consequences become.

Examples of Hyperinflation

Many countries experienced hyperinflation in the 20th century. The most record-breaking examples of this phenomenon in world economic history are:

Zimbabwe, early 21st century. The inflation rate reached 230,000,000% per year.
Hungary, 1946. The inflation rate reached 42 quadrillion percent.
Yugoslavia, late 1993. The inflation rate reached 5 quadrillion percent.

Zimbabwe is considered the most famous example of hyperinflation: in 2008, product prices increased at an unprecedented speed – by 1.5 times per hour.

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