Hyperinflation is Causes and consequences of hyperinflation for the economy

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:45

Hyperinflation is galloping - a very dangerous phenomenon for any state, and no one is immune from it. At one time, almost all countries of the world "had been ill" with hyperinflation, even those that are today the leaders of the world economy.

In this article, we will consider not only the main causes of hyperinflation, but also its consequences for the national economy.

What is inflation?

First you need to understand what inflation is in general.

The word is of Latin origin (inflatio - swelling). It is the process of raising the price of goods and services. In the people it is also often referred to as "the depreciation of money." With inflation, after a certain period of time, a person for the same amount of money will be able to buy much fewer goods.

Should not any short-term rise in price of certain goods be called inflation. After all, this is a long-term process that covers the entire market.

The opposite of inflation is a process called deflation in economics. This is a general decrease in the level of prices for goods and services. Short-term deflation occurs quite often and differs, as a rule, by seasonality. So, for example, prices for strawberries in June can significantly decrease due to its massive collection by summer residents. But long-term deflation is a rather rare phenomenon. To date, such an example can only be called Japanese deflation, which fluctuates within one percent.

Types of inflation

In modern economic theory, open and hidden inflation are distinguished. The latter was typical for states with a command-planned economy (in particular, for the USSR), where these phenomena were tightly controlled by the state.

There is also supply and demand inflation, balanced and unbalanced, predictable and unpredictable inflation. However, the most important is the classification according to the intensity of manifestation. According to this typology, it is customary to single out inflation:

creeping;
galloping;
and hyperinflation.

Creeping (the most harmless) inflation is characterized by a moderate rise in prices (within no more than 10% annually). Some experts even consider it a positive phenomenon, as it stimulates the further development of production capacities. Such inflation, as a rule, is easily controlled by the state, but at any moment there is a risk that it will develop into more complex forms.

Rampant inflation and hyperinflation are more dangerous for the economy. In such a situation, the state needs to take a set of anti-inflationaryactivities.

Hyperinflation is…

How is this form of inflation different?

Hyperinflation is a phenomenon in the economy, which is accompanied by extremely high price increases - from 900% to millions of percent per year. Most often, it leads to the complete collapse of the commodity-financial system in the country and is accompanied by an absolute distrust of the national currency on the part of the population.

During hyperinflation, money can completely lose its main functions. In not so distant history, there were examples when at that time money was replaced by barter in kind (the so-called barter). Or some commodity acted in their role (just like in the early stages of the development of society). It could be sugar or cigarettes. Sometimes hyperinflation in a certain country is accompanied by dollarization - when the national currency is (partially or completely) superseded by the most stable world currency.

Hyperinflation is, first of all, a kind of indicator of a deep economic crisis in the state. In other words, if we draw an analogy with medicine, this is not the "disease" itself, but only one of its painful and unpleasant symptoms. Other accompanying signs of such a crisis may be the mass impoverishment of the people, numerous bankruptcies of enterprises, default on external debts of the state, and so on.

Causes of hyperinflation and its consequences for the economy

Illiterate or criminal actions of the government most often create prerequisites for this phenomenon. When the statetries to hide its expenses and budget deficit with the help of emission (additional issue of banknotes), then such actions after a while will necessarily lead to hyperinflation. After all, this printed money is not supported by real commodity production. Of course, all this will entail a rise in prices, the pace of which will depend on the amount of money printed, as well as on some other factors.

An additional reason for hyperinflation can also be a massive withdrawal of funds from circulation - into bank deposits. However, during the economic crisis, as a rule, opposite trends are observed.

What does hyperinflation lead to? Among its main consequences are a general decline in production, the depreciation of savings, as well as the complete collapse of the financial system in the country.

The most famous examples of hyperinflation

Many countries experienced hyperinflation in the 20th century. Below are three of the most record-breaking examples of this phenomenon in the history of the global economy:

Zimbabwe, early 21st century. The inflation rate was 230,000,000% per year.
Hungary, 1946. The inflation rate was 42 quadrillion percent.
Yugoslavia, late 1993. The inflation rate was 5 quadrillion percent.

In the modern world, Zimbabwe is considered to be the most striking example of hyperinflation. In the photo below - the famous bill of one hundred trillion Zimbabwean dollars.

In conclusion…

Hyperinflation isa type of inflation characterized by extremely high rates of annual price growth (from 900 to several million percent per year). So, in Zimbabwe in 2008, food prices increased at a record speed - one and a half times per hour.

Inflation and hyperinflation (in particular) usually accompany deep economic crises, the consequences of which can be extremely severe for a particular state.