Too embarrassed to ask: what is hyperinflation?

Mention hyperinflation and many of us will think of wheelbarrows full of cash in Weimar Germany. Or, more recently, Zimbabwe or Venezuela. But what exactly is hyperinflation and how does it come about?

The first thing to understand about hyperinflation is that it’s not just really, really high inflation. High inflation – in the sense of broadly rising prices for goods, services and wages – can certainly be very disruptive. For example, in the 1970s, at one point prices in the UK hit were rising by more than 20% a year. It’s a decade well known for civil unrest and financial turmoil. 

However, hyperinflation is on an entirely different level. One technical definition of hyperinflation is when prices are rising at a rate of more than 50% a month. At that rate, prices will have risen by roughly 130 times by the end of the year. 

As you can imagine, keeping track of price changes in that situation is virtually impossible. In short, what hyperinflation really represents is the point at which faith in a country’s currency and economy has been destroyed. The currency is effectively worthless.

The most famous example is from the 1920s and Weimar Germany, with its images of people pushing wheelbarrows full of money.  More recent examples include Zimbabwe in the late 2000s, and even more recently, Venezuela. How does this happen? 

Hyperinflation is often associated with money-printing. However, it’s more accurate to say that money-printing can be a symptom of hyperinflation rather than the underlying cause. 

There are several factors involved, but two stand out as crucial. One key factor is the destruction of a country’s ability to produce as many goods and services. For example, political corruption and mismanagement resulted in the collapse of both Zimbabwe’s farming industry and Venezuela’s oil industry. Weimar Germany, meanwhile, happened in the wake of the devastation of World War I. 

Another key factor is that a country has high levels of debt or other obligations that need to be paid in a foreign currency. These debts are clearly unaffordable and yet the country cannot just print money to get rid of them. Instead, the value of the domestic currency collapses as the economy’s reduced productive capacity is channeled into paying these debts.

This is not to say that hyperinflation couldn’t happen in a developed economy like the UK or the US, who issue debt in their own currencies. But it would imply a devastating economic and civil collapse, rather than simply too much quantitative easing. 

For more on inflation and its causes, subscribe to MoneyWeek magazine.

Recommended

Who is the richest person in the world?
Entrepreneurs

Who is the richest person in the world?

Jeff Bezos, Bill Gates and Elon Musk are among the richest people in the world, but the top spot belongs to someone else.
7 Jun 2023
The building blocks for an income strategy: resilience, growth and diversification
Advertisement Feature

The building blocks for an income strategy: resilience, growth and diversification

Iain Pyle, Investment Manager, Shires Income plc
7 Jun 2023
Saving vs investing: which is better to help you make more money?
Personal finance

Saving vs investing: which is better to help you make more money?

Saving has become a more attractive option with interest rates hitting the highest levels seen in years, but if you’re prepared to take some risk inve…
7 Jun 2023
Look beyond familiar stockmarkets for reliable returns in rough times
Share tips

Look beyond familiar stockmarkets for reliable returns in rough times

A professional investor tells us where he’d put his money. This week: Giles Parkinson, managing director of global funds at Close Brothers Asset Manag…
7 Jun 2023

Most Popular

How much will it cost you to retire early?
Pensions

How much will it cost you to retire early?

The pre-state pension income gap means couples may need an extra £136,000 if they want to retire at 60 – can you afford to retire early?
6 Jun 2023
Best easy access savings accounts – June 2023
Savings

Best easy access savings accounts – June 2023

Rising interest rates have boosted the returns on instant-access savings accounts and we're seeing some of the highest rates seen in years. We look at…
6 Jun 2023
Best debit and credit cards to use while travelling abroad
Personal finance

Best debit and credit cards to use while travelling abroad

If you’re going on holiday or travel abroad regularly, it’s worth knowing what the best card is to avoid hefty fees. We weigh up the charges and any p…
6 Jun 2023