Economists typically define hyperinflation as a rapid and unrestrained increase in prices at a rate exceeding 50% per month. Historically, governments have spurred inflation by flooding their economy with currency. This often comes in the form of a surge in spending on all sorts of government programs.
Takeaways
What is the difference hyperinflation and inflation
Learn from previous hyperinflation examples
How you can protect yourself from hyperinflation
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The consensus among most economists is that it is not. Some, however, disagree strongly. They cite several warning signs of future hyperinflation. These include the pandemic, an increase in the money supply, and supply shortages because of demand-pull inflation. In this article, we'll review three hyperinflation warning signs. We'll also highlight examples of how each played out in different economies around the world.
Catastrophic events—like wars, natural disasters, and political unrest—often precede hyperinflation. In the United States, the nearest thing resembling hyperinflation the nation has ever experienced occurred during the Civil War (1861-1865).
The global pandemic certainly qualifies as a calamitous event. The tragic loss of life was compounded by the collapse in economic activity as the lockdowns shuttered businesses. The fear is that the economic effects of the pandemic could be long-term. This could foreshadow a period of soaring prices, volatility, and a market sell off.
Here are a few other examples of how catastrophic events have preceded hyperinflation.
Greece began experiencing serious inflation problems during its occupation by German troops during World War II. Inflation reached a peak in October 1944 after the exiled Greek government recovered control of Athens. In that month alone, prices skyrocketed by 13,800%.
As hyperinflation pummeled the economy, the Greek government continued to redenominate the currency. By the end of 1944, the government had issued a 100 trillion drachma note. The conversion rate of the old drachma to the new was 50 billion to one. Many people refused the worthless currency. Instead, they opted to conduct trade in British Military Pounds.
The decline in public purchasing power and destruction of the banking system were followed by a civil war. This kept Greece in economic turmoil until monetary reforms in 1947.
After its war for independence from Pakistan, the government faced problems of rising inflation. On top of this there was a global oil shortage and a decline in trade. The outbreak of natural disasters—drought, cyclones, and flooding—did not help.
According to a report by the World Bank, Bangladesh's war for independence displaced 12 million people. Also, a massive cyclone killed 300,000 more. As a result, the nation's infrastructure and its productive capacity lay in ruins. This culminated in hyperinflation and famine.
When a government begins printing money to pay for its spending or to finance its borrowing, it increases the money supply. The Washington Post reports the U.S. Federal Reserve expanded the country's money supply by a staggering 40% over 2020 and 2021. The Fed's goal was to protect the nation from financial collapse. This was due to the pandemic closing huge sectors of the economy.
Fed detractors, however, say these actions are exactly what fuels inflation. With too much cash floating around, prices skyrocket. Too much money chases a scarce supply of goods. People buy more now to avoid higher costs later. The problem worsens if consumers hoard and create further shortages.
Two classic examples of this scenario are Hungary and Venezuela.
After World War II, Hungary's infrastructure and industrial capacity lay in ruins. Consumer goods were scarce. The government had no tax base to back up its currency. At its peak, hyperinflation rose an astonishing 150,000% each day.
Hungary's situation is an example of fiat money. This is a currency made legal tender by government decree or fiat. It is especially susceptible to inflationary pressures. Fiat money is not connected to any value in gold or commodities. Market pressures, wars, and social upheavals make fiat money vulnerable to hyperinflation.
Hyperinflation only reduced and stabilization began when the Hungarian government introduced the Forint. The currency at the time had a direct conversion into gold.
Hyperinflation arrived in Venezuela after the government tried to pay for expensive social programs. The government's main source of revenue was through the sale of oil. They attempted to increase spending when the global price of oil dropped. As a result, the economy went into crisis mode. The government under President Nicolas Maduro then tried to staunch the bleeding by printing more money.
As the price of oil continued to fall and Venezuelan oil output dropped further, printing more money worsened the problem. Many Venezuelans dumped their currency. They converted their savings to U.S. dollars in ATMs across the border.
In 2021, Venezuela's inflation rate hit 686.4%. This was down from 2020 when inflation came in at 2,959.8%. The government claims hyperinflation is behind them. Still, the average Venezuelan consumer continues to struggle with a triple-digit inflation rate. This leaves 76.6% of the population living in extreme poverty.
Demand-pull inflation is when the demand for goods and services is much higher than the supply. We've experienced demand-pull inflation as supply chain disruptions caused by the pandemic have spread globally.
The shortages that typically result from demand-pull inflation can affect entire economies. This is illustrated by Zimbabwe where excessive government spending only made things worse.
Zimbabwe has a turbulent history of political unrest and international sanctions. It suffers from crop failures caused by the collapse of its agricultural infrastructure. The country has long experienced demand-pull inflation with ongoing shortages of food and goods.
In 2006, hyperinflation began in earnest. The nation experienced an annual inflation rate above 1,000%. According to the Cato Institute, by November 2008, the monthly inflation rate soared to a crippling 79.6 billion percent. Prices of products doubled every 24 hours. This resulted in more hardship and empty food shelves.
The government tried to stop hyperinflation by devaluing its currency. This only made things worse. Zimbabwe holds the world-record with its 100-trillion-dollar bank note.
As the previous examples show, periods of hyperinflation are often foreshadowed by obvious warning signs. Many economists agree that developed countries like the U.S. have policies and controls in place to avoid hyperinflation. Yet, regular inflation is still a major concern. Inflation erodes the value of savings and investments. This is why inflation protection is so important.
Fortunately, there are hedges against inflation risk that can help protect the value of your investments. Three popular hedges are:
It is important you understand how to research and analyze investments before making a purchase. Some simple fundamental analysis is often all it takes. This will allow you to uncover stocks that have pricing power. These tend to do well during inflationary times. You'll also be able to find undervalued assets that the market is currently ignoring. These opportunities can help you hedge against the impact rising prices have on your investments.
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