Hyperinflation

Hyperinflation is a situation where prices rise rapidly as a country's currency loses its value. In simpler terms, it refers to extremely fast inflation. This phenomenon often arises when there is a significant increase in the money supply that is not matched by growth in gross domestic product (GDP), leading to an imbalance between the supply and demand for money.

Economists typically use the term to describe instances when the monthly inflation rate surpasses 50%. As the money supply expands, the demand for money tends to decline, resulting in a swift decrease in the currency's value. Hyperinflation not only renders money practically worthless but also devastates the economy.

For instance, Venezuela experienced hyperinflation starting in 2016, which led to a collapse of its economy. Similarly, during the Great Financial Crisis, Zimbabwe faced the second-highest hyperinflation rate in history, with an astonishing inflation rate of 79,600,000,000% in November 2008, equating to a daily inflation rate of 98%.

What triggers hyperinflation? It typically occurs due to a substantial increase in the money supply that is not backed by economic growth. In essence, it results from dramatically inflating the amount of money circulating in the economy. This increase is often driven by the government printing more money, which leads to rising prices as more currency enters circulation.

What are the consequences of hyperinflation? It rapidly erodes the value of the local currency as the prices of goods and services rise alongside the increased money supply. Consequently, individuals holding the local currency often seek to reduce their cash holdings and switch to more stable foreign currencies.

To avoid paying higher prices in the future due to hyperinflation, people typically start hoarding durable goods such as equipment, machinery, and jewelry. In prolonged hyperinflation scenarios, individuals may even begin to stockpile perishable items. However, this behavior creates a vicious cycle: as prices escalate, people hoard more goods, which in turn drives up demand and further inflates prices.

If hyperinflation persists unchecked, it almost always leads to a significant economic collapse. Severe hyperinflation can force the domestic economy to revert to a barter system, severely undermining business confidence. For example, in Zimbabwe, with unemployment rates exceeding 70%, economic activities ground to a halt, resulting in a barter economy.

Additionally, hyperinflation can dismantle the financial system, as banks become reluctant to lend money, further complicating the economic landscape.