What Is HyperInflation?
Hyperinflation describes sudden, uncontrolled, and abnormally high price increases in a country’s economy. Inflation is found by comparing the price increase of goods and services with the previous period. For example, it expresses the rate of change between the prices in the last month and the new prices in the next month. In short, inflation measures the rate of the price increase. Hyperinflation is used for price increases, typically more than 50% per month, which would upset the entire price and wage balance in any given market.
Causes of Hyperinflation
The increase in money supply and demand inflation are the two most fundamental factors that cause hyperinflation. Because hyperinflation often occurs when there is an increase in the money supply and pushes demand behind supply, driving prices up.
The most crucial cause of hyperinflation is excessive monetary expansion. In states where the central bank is not independent, the government also manages the monetary policy. At this point, the government’s decision to print money uncontrollably to pay salaries, invest or close the budget deficit causes very high inflation.
Inflation occurs to some extent in all economies, as the average price of products rises as the purchasing power of the currency decreases. Often, governments and financial institutions work together to keep inflation at a soft and slow pace. However, in many cases in history, inflation rates have risen at an unprecedented rate, causing the actual value of the country’s currency to fall at alarming rates. A rapid rise in inflation is called hyperinflation.
What is Excessive Money Supply?
In times of economic crisis and economic recession, it is inevitable to experience excessive inflation. Economic depression is defined as stagflation when it occurs in an inflationary environment. In such a period, the growth rate drops to negative values. Extremely high unemployment, bankruptcies of companies and traders, lower production data, and an environment where it is difficult to find credit point to an economic depression. Central banks’ search for solutions by increasing the money supply, that is, by printing money, and the willingness of consumers to pay higher prices, triggering inflation. Although the market reacts negatively, if money continues to print, hyperinflation is inevitable.
What is Demand Inflation?
Another factor that causes hyperinflation is demand inflation. In an environment where demand exceeds supply, owners of goods and services have the opportunity to raise prices. This leads to an increase in prices and thus inflation. The supply-demand imbalance reaches extreme levels, and the demand cannot meet the supply, especially in essential products such as food, medicine, and shelter, which invites hyperinflation. This can occur due to increased consumer spending, a spike in exports, or higher government spending.
Types of Inflation
a) Creeping inflation; indicates an inflation rate between 0.1% and 1.0%. If there is inflation at this level, the risk of increasing future inflation is not expected. This rate of inflation keeps consumers and investors away from passive investments such as opening a bank account. In an unstable economy at these rates, investors make bolder decisions because there is less risk expectation.
b) Low inflation; An inflation rate of between 1.1% and 3.0% is considered low. A low inflation range does not create permanent inflation expectations for the future. This is one of the most common types of inflation. It is widely believed that these inflation rates are beneficial in terms of vitality in the economy and encourage production and investment. However, when the inflation rate starts to approach 3 percent, it is necessary to be careful as it will be possible to create inflationary expectations.
c) Moderate inflation: Inflation rates between 3.1% and 8%.0% are considered an average inflation rate. Inflationary expectations get stronger as they exceed 5%. These rates are considered partially normal in developing economies. It is possible to switch from this moderate inflation rate too high inflation. Therefore, public expenditures should be closely monitored in developing economies, and monetary policy should not be loose.
d) High inflation; An inflation between 8.0% and 15.1% are considered hyperinflation. Inflation exceeding 10% strengthens future inflationary expectations. When high inflation turns into expectations in the market, it is not easy to stop the inflationary process without taking measures to ensure an atmosphere of confidence in the market. Inflation approaching 15% indicates that the problem is getting severe and the solution is getting harder and harder. In order to reduce this rate, it is inevitable for governments to take solution-oriented measures.
e) Very high inflation; Rates of 15.1% and above indicate high inflation. As interest rates rise, inflationary expectations get stronger. In this case, the danger of hyperinflation increases. In the process of high inflation, it is necessary to implement strict fiscal measures and economic policies. For example, reducing public expenditures, taking austerity measures, key actors in the market, reassuring the central bank, etc.
f) Hyperinflation: It is a situation where the monthly inflation rate exceeds 50%. Hyperinflation is an atmosphere of crisis that is extremely difficult to reverse and requires great sacrifices. The actual consequences of events feed hyperinflation processes. But on the one hand, it expresses a crisis of confidence. In countries with hyperinflation, the economic management and even the political power had to be changed to overcome the crisis periods.
Hyperinflation In History
Post-WW1 Germany Hyperinflation
The Germany of 1923 is the ideal example for the most striking example of hyperinflation. After the war, the German economy, which was sentenced to an indemnity that could not be paid, entered the process of collapse. The amount of money he had was not enough for Germany to pay its debts. Germany began to print money both to meet the money demand of the domestic market and to pay off its debts. As a natural consequence of this, the German Mark began to depreciate rapidly against the US Dollar, Sterling, and Frank. The decline in the value of money has increased exponentially even during the day. As a result, production and trade ceased. The price of a loaf of bread rose from 250 Mark in January 1923 to 200 Million Mark in November 1923. 1 US dollar was equal to 4 trillion German marks. The German economy could not even afford the cost of printing paper and coins.
In the 1990s, when the former Yugoslavia was on the verge of disintegration, annual inflation exceeded 75%. It was understood that the leader of the Serbian province, Slobodan Milosevic, gave a loan of $ 1.4 billion to the Serbian central bank for his krone. This indicated that the national treasure had been plundered.
In the atmosphere of the financial crisis, the central bank began to print excessive amounts of money to pay off its financial debts. The inflation rate reached 300 million percent. Majority of citizens started not to use money, but to trade with barter, and live without any purpose other than to obtain basic food items. The Yugoslav economy collapsed as the currency lost its function.
Venezuela has spent the last decade with severe traumas such as political crises, social events, economic collapse, and hyperinflation. The atmosphere of crisis in the country still continues. The hyperinflation in Venezuela is a combination of multiple catalysts that contribute to hyperinflation. For example, in 2016, many reasons such as the increases in the Venezuelan central bank’s policies towards money supply and interest rates, high taxes, the currency crisis, the inability of the supply to meet the demand in many basic product groups, including food, political instability, and US sanctions were experienced together. Hyperinflation was inevitable due to the extreme and unstoppable depreciation of the Venezuelan currency, the abnormal increase in primary commodity prices, famines, and social events. Hyperinflation coupled with a distraught economy caused the events that led to the collapse of Venezuela’s economy.