Hyperinflation

Definition

Hyperinflation is defined as a very rapid inflation: an increase in the general price level of an economy. The immediate cause of hyperinflation is the rapid printing of new currency which leads to a devaluation of the currency. It differs from ordinary inflation in the following basic ways:

1. Visibility and frequency: Its effects are usually noticeable by people in day-to-day operations. This is in contrast with regular inflation, where price changes due to inflation are often masked by price changes due to seasonal variations in demand and supply. One of the symptoms of hyperinflation is that you see the prices change in front of your eyes as you are shopping or that the price changes between the time you pick up items from the grocery store and the time that you go to the counter to pay your bills. Frequent price changes due to hyperinflation lead to high menu costs and a breakdown in the usefulness of the price mechanism to convey information throughout the economy.
2. Low confidence in currency: In a situation of hyperinflation, people using the currency have low confidence in it. They usually insist on instant payment, consume money quickly or convert it into durable assets. People incur significant shoeleather costs due to this.
3. Alternative currencies as peg: People use foreign currencies as a peg for wages, prices, and other monetary information. In some cases, they may transact using foreign currency, often exchanged on the black market because official exchange rates may not keep pace with the inflation. When a foreign currency is unavailable, people may use barter or even use other goods as currency.

The rate of hyperinflation is usually several percentage points a month. There are different standards for what constitutes hyperinflation, the lowest being a minimum 5-10% per month increase in the price level and the highest being a minimum 50% per month increase in the price level.