Hyperinflation

A situation in which the rate of inflation is very high and/or rises constantly and eventually becomes out of control is called “hyperinflation”. Socially, hyperinflation is a very destructive phenomenon which has far-reaching consequences for individuals and society as a whole. Although there is no generally accepted definition of hyperinflation, most economists would agree that a situation where the monthly inflation rate exceeds 50% can be described as hyperinflation.

Hyperinflation and periods of very high inflation occurred several times during the 20th century. Below are some examples of countries that experienced such high annual rates of inflation and the respective figures for the years indicated:

1922 Germany 5,000 %

1946 Hungary 41,900,000,000,000,000%

1985 Bolivia more than 10,000 %

1989 Argentina 3,100 %

1990 Peru 7,500 %

1993 Brazil 2,100 %

1993 Ukraine 5,000 %

The post-WWII hyperinflation of Hungary holds the record for the most rapid monthly inflation increase ever. It means prices doubled every 13,5 hours.

Let us briefly illustrate the consequences of such a phenomenon. An inflation rate of 50 % per month implies an increase of more than 100-fold in the price level over a year and an increase of more than two million-fold over three years. There is no doubt that such rates of inflation place a heavy burden on society. In fact, in Germany, the hyperinflation that followed World War I and peaked in 1923 had devastating economic, social and – as is widely agreed – political consequences.

As many people lost their savings, this led to a substantial loss in wealth for broad segments of the population. The realization that price levels were constantly rising sparked a vicious circle. People naturally asked for higher wages, anticipating higher price levels in the future. These expectations became a reality, since higher wages translated into higher costs of production, which again meant higher prices. In the same vein, people started to pass on their money – which lost its value – by spending faster and faster.

The Government reacted to the decline in the value of money by adding more and more zeros to the paper currency, but over time it became impossible to keep up with the exploding price level. Eventually these hyperinflation costs became intolerable. Over time money completely lost its role as a store of value, unit of account and medium of exchange. Barter became more common and unofficial monies, such as cigarettes, which did not lose their value due to inflation, started to replace official paper money.

The first country to hyperinflate in the 21^st century is Zimbabwe. In 2008, a loaf of bread cost 1.6 trillion Zimbabwe dollars. Officials in Zimbabwe blamed it on rising global food prices and international sanctions. The Zimbabwean dollar bank note holds the record for the greatest number of zeros shown (100,000,000,000,000). Hungary holds the record for the largest banknote ever issued, but its bank note did not depict all the zeros – the amount was spelled out.