Hyperinflation
Hyperinflation is an extremely rapid and accelerating rise in prices, conventionally defined as inflation above 50 percent a month. Money loses value so fast that people stop holding it and switch to goods or foreign currency.
Also called: runaway inflation · German hyperinflation · Weimar hyperinflation · extreme inflation
The standard threshold comes from the economist Phillip Cagan, whose 1956 study dated a hyperinflation from the first month prices rose by more than 50 percent and ended it when the monthly rate stayed below that level for a year. At 50 percent a month, prices rise roughly 130-fold in a year.
Hyperinflations almost always share a cause: a government financing large deficits by having its central bank create money, known as monetary financing, at a time when it cannot borrow or tax enough. Germany's episode, which the IMF dates from August 1922 to November 1923, came after the Ruhr occupation, when the government paid workers and firms in the occupied region to resist passively and printed the money to do it. Reparations added pressure on the budget and the exchange rate, but they were one cause among several.
It ended with a currency reform. The Rentenmark, introduced in November 1923, replaced one trillion paper marks, and a credible limit on new money did the rest.
Hyperinflation drives dollarization, capital flight and a parallel market for foreign currency. Contracts move to hard-currency pricing, banks lose deposits, and payment providers face rates that change between quote and settlement. In such markets, a business moving money in or out has to think about how long funds sit in the local currency, not just the price.
In practice
The 50 percent-a-month line is a research convention, not a legal definition. High but lower inflation, such as 100 percent a year, does severe damage without meeting it.
Example
A price of 1,000 units rising 50 percent a month becomes 1,500 after one month, about 11,400 after six months and about 130,000 after twelve. A payment invoiced in local currency on 30-day terms loses a third of its value before it is paid.
Learn more on Money Wiki
This page gives the short answer. Money Wiki has a longer guide to Hyperinflation, with more detail and background.
Commonly confused with
| Term | How it differs |
|---|---|
| Devaluation | A devaluation is a one-off cut in a currency's official value. Hyperinflation is a continuing collapse in what money buys at home, which drags the exchange rate down with it. |
See also
- Monetary FinancingMonetary financing is a central bank funding government spending directly, by lending to the state or buying its debt when issued, with newly created money. Many legal systems prohibit it because of its link to high inflation.
- DollarizationDollarization is the use of a foreign currency, usually the US dollar, in place of or alongside a country's own for saving, pricing and payment. It can be official policy or something households and firms do on their own.
- DevaluationDevaluation is a deliberate official reduction in the value of a currency that is fixed or managed against another. It makes exports cheaper and imports dearer overnight, and is usually forced by reserves running too low to defend the old rate.
- Parallel Market RateA parallel market rate is the rate at which a currency actually trades outside official channels, in a country where the official rate is not obtainable. In a tightly controlled market it is often the only rate at which real business clears.
- War ReparationsWar reparations are payments a defeated state is required to make to the victors for losses and damage caused by a war. They are usually fixed by treaty or by a commission, and are paid in money, goods or services over many years.