Hyperinflation

Hyperinflation is extremely fast inflation, usually defined as prices rising more than 50% in a month. Money loses its value so quickly that people rush to spend it, which pushes prices up even faster.

🌍 In the real world

The 50%-a-month threshold comes from the economist Phillip Cagan's 1956 study of hyperinflations. At that pace prices rise about 130 times in a year, because each month's rise builds on the last: 1.5 to the 12th power is about 130. Hyperinflations usually start when a government pays its bills by creating money, often after a war, a collapse in tax revenue or heavy debts in a foreign currency.

In Germany after World War I, the Weimar Republic printed money to pay its spending and war reparations. By October 1923 prices were doubling about every four days, and a US dollar cost 4.2 trillion marks by November. Workers were paid twice a day and spent their wages at once; photographs show people carrying banknotes in wheelbarrows. A new currency, the Rentenmark, ended it in November 1923, at one Rentenmark for a trillion old marks.

Zimbabwe's hyperinflation peaked in November 2008, with prices estimated to double about every day; the country printed a 100-trillion-dollar note before abandoning its own currency in 2009. Venezuela entered hyperinflation in the late 2010s: its central bank put 2018 inflation at about 130,000%, and the country removed zeros from its currency in 2018 and 2021.

Savers who hold cash, or bonds and bank deposits fixed in the currency, are wiped out, while borrowers see their debts melt away. People switch to foreign currency, goods or barter. Because money no longer works as a store of value, saving and long-term planning break down, which is why central banks guard against high inflation.