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What Is Hyperinflation

In Economics the concept of hyperinflation refers to very high and typically accelerating inflation. It helps to describe rapid, excessive and out-of-control general price increase in an economy. It quickly erodes the real value if the local currency as the prices of all goods tends to increase. This forces people to minimise their holding of that currency and also look for shifting to other stable foreign currencies. Unlike low inflation, where the process of rising prices is protracted and not generally noticeable except by studying past market prices, hyperinflation sees a rapid and continuing increase in nominal prices, the nominal cost of goods, and in the supply of currency. Although in developing countries hyperinflation is quite a rare event yet it has already occurred in various countries and many times throughout the history. Such countries include: China, Germany, Russia, Hungary and Argentina. Hyperinflation is generally seen in times of major crisis or challenges like economic turmoil or at times of wars. While hyperinflations generally occurs once, when they begin the spiral effect goes out of control. When hyperinflation occurs there tends to be a surge in the prices for basic goods which include food and fuel and it becomes scarce.

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Why Hyperinflation Occurs - Causes of Hyperinflation

There are two main causes behind hyperinflation which are: increase in the money supply and demand-pull inflation.

Money supply actually happens when the government of any country begins to print money for the purpose of paying for its spending. Hence in this process as the money supply increase there is also an increase in the price leading to regular inflation. Another cause is demand-pull inflation where there is a surge in demand in comparison to the supply of goods and thus leading to price hike. This can actually happen due to increase in customer spending or due to the growing economy or due to sudden rise in export or in the government spending. These two often move hand-in-hand. It might happen that instead of tightening the money supply to stop this inflation the government might choose to print more money. Thus with too much currency flow the prices reach skyrocket. Once the consumer understands that this is happening around, this leads to continued inflation. Hence customers also tend to buy more because they fear that the prices might increase and they might have to pay much more later. This creates excessive demand which aggravates inflation, customers’ stock goods which creates unnecessary shortage and altogether worsens the situation all around.

Example of Hyperinflation

There have been various times when the global economy has been hit very badly by hyperinflation. For example Zimbabwe has been under a period of currency instability and was hit by hyperinflation which actually began in February 2007 and it increase in 2008 and 2009. It was during this time that even the government stopped filing official; reports and identifying the statistics. However, Zimbabwe's peak month of inflation is estimated at 79.6 billion percent month-on-month, 89.7 sextillion percent year-on-year in mid-November 2008. It was in 2019 the Zimbabwean government announced that it would reintroduce the RTGS dollar which is now known as “Zimbabwe dollar” and the government also announced that all foreign currency will no longer remain a legal tender. It was estimated that by the mid of July in 2019 the inflation had increased to almost 175% which actually sparked greater concerns as the country was again entering a new period of hyperinflation.  Finally in March 2020 the inflation was seen to reach above 500% annual and then a new taskforce was created to assess currency issues. Finally in July 2020 the overall annual inflation rate was estimated to be 737%

How to fix hyperinflation

In most cases hyperinflation is addressed by the government by adapting to some foreign currency as official. The government of the country have to take a major responsibility to address the condition. For instance in the case of hyperinflation that was observed in Zimbabwe the US dollar, the euro, and the South African rand were candidates; the US dollar had the most credibility and was the most widely traded within Zimbabwe. In 2009 the government of Zimbabwe abandoned printing the Zimbabwe dollars and also advised and compelled the citizens to use foreign currency of their choice. In 2014 the Reserve Bank of Zimbabwe unveiled “convertible” coins for denominations of US$0.01 through US$0.50. Demonetization is also important way to fix hyperinflation. Apart from this the government can also increase the production of goods that will help to address the existing artificial shortage and can also help to reduce the existing monetary pressure. As there also an existing danger of cyclic reaction that arises from hyperinflation that to address this challenge that hyperinflation does not start again in the country, the government needs to match production growth and also maintain stability in the overall production process. Thus in the overall process of fixing hyperinflation the government plays a very important role thus ensuring that the overall economy earns a stable economic  condition and the global market is open to trade and employment.

Advantage and disadvantage of hyperinflation

The advantages of hyperinflation are:

• Hyperinflation at times benefits the debt holders depending on how prevalent and severe the inflation is, just written off. For instance if an individual has taken some loan for around 3 Million in whichever currency the credit is denominated into. Thus when hyperinflation hits and three month down the line the Central Bank will begin issuing 2 Million notes which in the labour market could be at that point the equivalent of 3 or 4 hours of labour.
• For any not so easily expandable supply commodity such as precious metals whose prices will automatically rise in the hyperinflation period. So individuals holding the same can use it as a medium of exchange

The disadvantages are:

• Creating unnecessary shortage of goods
• People then to hold perishable commodities like fruits, vegetables
• The economy falls apart
• Cash becomes worthless

Affects the business environment, foreign trade relations