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What is hyperinflation?

Hyperinflation

Most of you will already be aware that currencies lose their value over time. The prices of goods and services slowly rise year after year, and the purchasing power of your money decreases as time goes on. 

Inflation is a natural consequence of any economic model that operates on a debt-based system. However, provided the economy is correctly managed, inflation should remain relatively consistent (approximately 2% a year) and its effects should be mitigated. 

In other words, your money should devalue slowly enough for you not to realise it is happening. It should only become apparent to you when looking back years later that your nation’s currency has lost value over time.

While inflation is the slow increase of prices in goods and services, hyperinflation refers to a process where the prices of goods and services rise so rapidly that the situation quickly becomes out of control, and the nation’s currency becomes essentially worthless. If we assume that inflation rises at approximately 2% a year, hyperinflation rises at approximately 50% a month.

What does this mean for an average person? 

Imagine you live in a country with an economy in which there is hyperinflation. You are earning $1,000 a month and currently, the cost of a loaf of bread is $0.50. In a country with normal rates of inflation, that same loaf of bread should cost you approximately $0.51 next year. In an economy with hyperinflation, it will cost you $0.75 next month and $1.05 the month after. 

As the hyperinflation continues, eventually the $1,000 a month that you earn will no longer be enough to survive. Over time, the currency of that nation will become all but worthless, and individuals who earn it will not be able to purchase the goods and services available in that economy. 

Where have you heard of hyperinflation?

Hyperinflation has been a regular occurrence throughout history, and happens when economic models are mismanaged, or disasters are suffered. We have seen hyperinflation happen in a range of countries from the former Yugoslavia (1992-1994), to Zimbabwe (2006-2008), to Germany (the infamous Weimar hyperinflation between 1921-1923). 

Value of one Goldmark in Papiermarks

You may have also heard reference to hyperinflation being made in discussions related to cryptocurrencies such as bitcoin (BTC). Since BTC has a decentralised fixed supply, it has the potential to act as a hedge against inflation.

What do you need to know about hyperinflation?

Hyperinflation is an extremely rare occurrence, especially in developed nation-states such as the US or the UK. For hyperinflation to occur in such advanced economies there would need to be an unmitigated disaster on an unimaginable scale. A global war, widespread corruption, or an unparalleled natural disaster would need to occur to cause hyperinflation in these economies. 

To put all this into context, the COVID-19 pandemic is said to have caused global economic turmoil. Despite this, according to economic data released by the US Bureau of Labour Statistics, the Consumer Price Index (CPI), the most well-known indicator of inflation, had increased just 4.7% from February 2020 to June 2021. 

Granted, this is double the rate of inflation in a normal year, but it is still a far cry from the 50% a month increase caused by hyperinflation.

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