Hyperinflation Explained – Definition, Causes and Examples

Inflation is defined as a general rise in prices. Hyperinflation is exactly what the term sounds like — hyper periods of out of control inflation. Prices are screamingly high in hyperinflation, and that is obviously very detrimental to an economy and the people who have to suffer through it.

Definition of Hyperinflation, Starting and Ending Times

In hyperinflation, prices of goods and services rise so drastically that consumers cannot buy much with their money. Hyperinflation generally runs rampant in all areas of the economy, meaning the cost of all goods and services advances by about the same amount across the country experiencing it. Even worse for that country and its economy, prices of the same goods and services in foreign markets have not similarly advanced.

Most economists agree that a period of hyperinflation begins when the rate of inflation exceeds 50% for a month. For a perspective, annual inflation in the U.S. since 1913 has averaged just over 3%.

Hyperinflation ends when the monthly inflation rate drops below 50% and remains under the mark for more than one year. That basis has been used as outlined in The Monetary Dynamics of Hyperinflation — a staple about the economic condition written in 1956 by Phillip Cagan.

Causes of Hyperinflation

Too much money is at the root of most hyperinflation occurrences. Currency supply exceeds equitable amounts of available goods and services — the money supply of a country is not supported by its gross domestic product (GDP) growth. The situation is often exacerbated when the government prints yet more money to pay bills, devaluing the currency further. Hyperinflation begins as local populations lose faith in the currency and seek other ways to secure transactions like bartering and using currencies from other countries.

In order to combat hyperinflation, severe measures have been undertaken. For one, the government of the area can reduce its costs sharply. For another, the currency of a foreign market can be adopted. Both measures are drastic in their implementation but can return the economy to a much more stable state.

Examples of Hyperinflation

As one example of hyperinflation, we can look to China in the 1940’s. One period ran from July 1943 through August 1945 where the highest inflation rate of 302% happened in June 1945. That extreme rate of inflation would be outdone a few years later during a second period of hyperinflation that ran from October 1947 through May 1949. In April 1949, the recorded rate of inflation spiked to 5070%.

More recently, Zimbabwe was hit with hyperinflation at a rate of 1,730% in 2006; up to 11,000% in June 2007; at 2,200,000% by July 16, 2008 and at an annual inflation rate of more than 11.2 million percent in July 2008. It peaked at an estimated 89.7 sextillion percent annual rate by November 2008. The country continued to print and issue larger and larger denominations until it eventually abandoned its currency and used foreign monies.

Many other examples of hyperinflation can also be given. Suffice it to say, most have not been proven as a positive thing for those affected.