Hyperinflation: What It Is and How It Affects You

Hyperinflation definition

Hyperinflation occurs when prices rise by at least 50% in one month or 1,000% per year. These massive price changes happen quickly, making common items unaffordable. Hyperinflation is a rare economic phenomenon, and the U.S. has never experienced it.

Hyperinflation causes

Hyperinflation can be triggered by events such as an excessive supply of money in the larger economy and demand-pull inflation.

» Learn more: What causes inflation?

Excessive money supply

Hyperinflation can occur when central banks rapidly increase the amount of money in circulation, such as issuing stimulus payments.

The hope in adding more money to an economic system is that more people will spend and borrow, thus spurring economic growth. But if most people don’t spend that extra money, then businesses won’t be able to sell their products. If products don’t sell, business owners may be forced to raise prices on the products that do sell to stay in business.

And as money loses value, this creates a cycle in which inflation continues to rise, which can lead to hyperinflation.

Demand-pull inflation

Hyperinflation can also be caused by demand-pull inflation, where demand for products or services exceeds supply and makes prices increase.

For instance, if you and your friend each want to buy a loaf of bread but your local grocery store has only one left, you and your friend can vie to be the highest bidder. Maybe your friend has $10 and you have only $9. The loaf of bread may be worth only $3, but because of the demand, the grocery store is able to push the price higher.

Now imagine a bread shortage across the country creating a widespread bidding war and astronomical bread prices: That’s demand-pull inflation.

Hyperinflation effects

Loss of trust in currency

When a country experiences hyperinflation, the people often lose faith in their currency. People often try to swap out their currency for goods they know will hold value. Sometimes people even switch to a foreign currency that is more stable.

Hoarding and hunger

When prices of consumer goods spiral out of control, people cannot afford to pay for them. Hyperinflation can force people to start hoarding out of fear they won’t be able to get basic necessities. All of this can lead to a rise in food supply shortages and, in turn, poverty.

Economic collapse

Economies with hyperinflation can fall into recessions or depressions. A nation’s currency can fully collapse, halting economic progress.

Is there hyperinflation in the U.S. now?

No. The inflation rate was 7.1% for the 12-month period leading up to November 2022, a 0.1% increase from October. Inflation would need to increase by 50% in one month to be considered hyperinflation. U.S. inflation hit an all-time high of 30.19% in 1778 during the Revolutionary War.^[0]

Hyperinflation examples

Zimbabwe

Between 2007 and 2009, Zimbabwe experienced severe hyperinflation, resulting in the government issuing a ZW$100 trillion bill. At Zimbabwe’s independence in 1980, its annual inflation was 5.4%. The country’s hyperinflationary period happened as a result of economic decline and increasing debt. Droughts and the redistribution of farmland affected the agricultural sector, reducing the nation’s output.

The government also paid bonuses to war veterans and attempted to cover the expense with tax increases. The pressure of unpaid bills led Zimbabwe to start printing money. People had more money than ever, but because a pack of coffee beans cost just shy of ZW$1 billion, they still couldn’t afford basic goods.^[0]

Germany

After World War I, Germany owed huge debts for war reparations. Germany was unable to afford imported goods, and the loss of its colonies meant the country could no longer use them for cheap materials.

This situation, coupled with hoarded money coming back into circulation after the war, created a nation with increasing inflation. By July 1922, prices had risen about 700%, piles of money could not buy basic goods, and farmers wouldn’t sell their produce for money that was worthless.^[0]

How to combat hyperinflation

If you’re living through hyperinflation, there isn’t much that can be done individually. Societies often see full-scale breakdowns as people struggle to meet basic needs. But periods of hyperinflation are extremely rare.

Protecting your money from high inflation is a different story, and there are several steps you can consider taking, such as:

• Investing in I bonds.

• Negotiating your bills.

• Keeping your money in a high-yield savings account.

• Increasing your income.

• Investing in stocks that perform well amid inflation, such as energy stocks.

• Investing in real estate, real estate investment trusts, or REITs, or real estate exchange-traded funds, or ETFs.

» Learn more: How to protect your spending power from inflation