Definition of hyperinflation
- Hyperinflation refers to the rapid, excessive, price increase in an economy.
- The rates usually exceed 50% each month and can reach 5 to 10% a day.
- Hyperinflation involves questions regarding both the supply and the velocity of money.
Causes of Hyperinflation
- This kind of situation is prevalent during war or severe economic turmoil.
- It can be caused due to excessive printing of money by the country’s government.
- Continued rapid increase in money supply.
- Supply shocks due to breakdown of systems or natural/manmade disasters.
Models of Hyperinflation
- Confidence model – refers to a series of events that removes the confidence that the authority issuing the currency will remain solvent causing massive inflation.
- Monetary model – refers to the positive feedback cycle of rapid monetary expansion.
Effect of Hyperinflation on the Economy
- It causes unprecedented surges in the price of basic goods such as food and fuel. This leads to a fall in the standard of living of the people as they cannot afford basic necessities and the cost of living is too high.
- People may even resort to hoarding of goods.
- The value of the currency is lost and purchasing power drastically drops as people lose faith in the fiat money. It can even lead to numerous individuals filing for bankruptcy.
- People may refuse to deposit their money in financial institutions.
- The tax revenues of the government take a severe hit.
- People resort to a barter system of exchange.
Tackling Hyperinflation
- Drastic measures such as a shock therapy of slashing government expenditure might be done.
- The government might alter the currency basis, for example dollarization or use of dollars as national units of currency.
- Aggressive measures by the central bank to maintain price stability.
- Stiff wage and price controls.
Examples of Country that Have Experienced this in the Past
- The Weimar Republic in the 1920s where the value of German Marc fell from about four to the dollar to one trillion to the dollar.
- Hyperinflation in the United States during civil war.
- Zimbabwe during Robert Mugabe’s time where the inflation rates were 98% a day.
- Hyperinflation in Venezuela from 2013 to 2018, where the inflation rates touched 65000%.
