I recently wrote an article about Inflation in Zimbabwe, which has recently passed the 100,000% causing widespread hardship for the population.

Definition of Hyperinflation: A rapid and unchecked increase in the price level. Typically it may involve inflation rates of greater than 100% or greater than 1000% Hyperinflation is often reported per month, or even per day. Another distinguishing feature of hyperinflation is the idea that inflation is out of control. i.e. not only are prices rising rapidly, but the rate of increase is rising rapidly as well. With each cycle inflation gets worse.

Examples of Hyperinflation

— The most severe month of hyperinflation occurred in Hungary in July 1946 when prices increased by 4.19 quintillion per cent (4,190,000,000,000,000,000 %)

— In the same year the Hungarian National Bank issued a 10 quintillion pengo note (one followed by 19 zeros 10,000,000,000,000,000,000)

— During the hyperinflation episode in Germany from 1922 to 1923, the Weimar Republic printed postage stamps with a face value of one billion marks, as prices doubled every two days. At one point in 1923, the exchange rate equalled one trillion Marks to one dollar

— In Yugoslavia prices increased by 5 quadrillion per cent between October 1, 1993, and January 24, 1995

(German Kid playing with Bank Notes
(Other photos show people using bank notes to heat a stove)

What Causes Hyper Inflation

Usually, countries with hyper inflation have the following features

Economic Costs of Hyper Inflation

1. Value of Savings falls. In a modern economy, interest rates are usually higher than the inflation rate. For example, if inflation is 5%. Interest rates may be 7%. Therefore, if you keep money in the bank or insurance fund, you maintain the real value of your money. However, when inflation becomes excessive, the rate of inflation is usually much higher than any potential interest rate. Therefore, people with savings see the real value of their wealth wiped out.

2. Menu Costs. These are the costs of dealing with rapidly rising inflation.

3. Lack of Confidence in the Finance Sector

The experience of inflation can become engraved on people’s mind making them suspicious of financers, bankers and the general economic system. It is no coincidence the Nazi party were able to feed off these suspicions to introduce extremist policies.

4. Lack of Investment and Economic Growth

Ultimately hyperinflation causes people to have lower spending and firms lose confidence in investing. This can cause the economy to slow down and reduce living standards.

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