What is Hyperinflation?

//What is Hyperinflation?
What is Hyperinflation? 2017-10-04T23:22:24+00:00

Definition: Hyperinflation is a rapid and often uncontrollable currency devaluation causing the prices of goods and services to skyrocket in a short period of time. Although there is no precise threshold for hyper-inflation, normally it describes an inflation rate that exceeds 50 percent.

What Does Hyperinflation Mean?

What is the definition of hyperinflation? Hyperinflation is usually caused by an extremely rapid growth in the money supply of an economy. When the monetary and fiscal policy allow the issuance of “new” money to accommodate for government spending, the money supply grows faster than the real output of the economy, thus causing inflation.

In this context, hyper-inflation occurs as a result of uncontrollable inflation. This is not a common occurrence, however, because governments and central banks monitor it very closely. It is estimated that hyperinflation only occurred about 55 times in the 20th century in Argentina, China, Germany, Greece, Hungary, Russia, and Yugoslavia.

Let’s look at an example.

Example

In 1944, following the World War II era, Greece faced hyperinflation. The monetary value of the drachma shared out every second day and the country’s fiscal budget balance went from a surplus before the War to a huge deficit. The main reason for this dramatic course in Greece’s economy was a significant decline in foreign trade due to WWII.

When the Axis powers invaded Greece, they forced the Greek government to support nearly a half million foreign soldiers and offer them financial protection. As a result, the Greek national income plummeted by almost 70%, which combined with lower tax revenues led to the need of printing new money to cover the war bills.

Another example is pre-WWII Germany. Germany was required to pay huge debts to the allies after the first World War. Germany couldn’t afford to do so, so they in turn just kept printing money. This increase in the money supply drove down the value of the Germany currency and drove up the prices of goods. A single loaf of bread cost a few thousand marks.

Summary Definition

Define Hyperinflation: Hyper inflation is a fast decrease in the value of a currency that drastically reduces the purchasing power of the currency marked by extreme price increases of normal goods and services.