Hyperinflation: Meaning, Causes and Impacts

Hyperinflation is a period when the inflation rate is exceptionally high. The percentage can be more than 50% per month, and in extreme cases, prices can double in one day.

It harms the economy. Money becomes worthless, and people find it difficult to buy products and services. People are eager to change their cash immediately into real goods because prices are rising very fast.

Causes of hyperinflation

Hyperinflation occurs because of the excessive growth of the money supply. It often happens when governments run a large budget deficit, and to finance the deficit, they print money. But, at the same time, a high increase in the money supply is not supported by growth in the output of goods and services. As a result, more money is printed to support government spending, and more cash chases limited products and services.  

Higher prices eventually need ever-growing amounts of new money creation to fund government deficits. This situation then creates a vicious circle in the economy.

High inflation makes people unwilling to hold local currency. They quickly spend after they receive money, which increases the velocity of money. The high velocity of money will accelerate inflation if the output does not grow at a considerable rate.

Supply shocks also cause out-of-control inflation. It is usually associated with war, but can also be affected by economic distress, political instability, or natural disaster.

Mismanagement in the economy can also play an essential role in driving high inflation. During the commodity boom, many countries, such as Venezuela, enjoy very high commodity prices. Instead of increasing expenditure to encourage future economic production capacity, more spending is spent on non-productive components. And when prices fall, government revenues also lower, but not necessarily spending also falls. It creates a problematic deficit for the economy.

Hyperinflation effects

Hyperinflation will make money lose its functions of the store of the value and serve as a medium of exchange only briefly. Hence, people prefer to hold real goods instead of cash. Its because the amount of money falls very quickly.

This situation requires fiscal reforms. Substantial reductions in expenditures allow the government to need no longer to print massive money. This, in turn, reduces the need to print money.

Here, historical data of hyperinflation