It’s no secret we’ve experienced a dramatic increase in the cost of goods since the start of the COVID-19 pandemic. With the most recent economic data, there is a concern that the United States may quickly enter a period of hyperinflation. Hyperinflation can cripple the economic health of an entire country.
What Is the Difference Between Inflation and Hyperinflation?
Inflation is a concept that most of us understand as the decrease of purchasing power of a given currency over time. In other words, the buying power of your money doesn’t stretch as far as it once did.
A gradual rate of inflation, roughly 2%, is thought to be healthy for an economy because it encourages investing and purchasing. Hyperinflation is rapidly rising inflation that usually coincides with out-of-control general price increases in an economy. Rampant price increases occur so rapidly that a consumer’s dollar does not have the same value as it previously did to buy a variety of items, even basic need items. The U.S. Federal Reserve is tasked with maintaining the country’s inflation rate, and the Federal Government lowers or raises interest rates to adjust the market to try and keep the economy in a healthy state.
So, if some level of inflation is normal and expected, how much inflation is there in the United States? In 2021, the annual rate of inflation was 6.2%! That is a 5.1% increase from the previous year.
Many fear that the U.S. will experience hyperinflation due to the drastic jump in inflation from 2020 to 2021. Although the economy is in a shift, hyperinflation is not present in the U.S. today. However, it is important to understand what could cause hyperinflation to happen.
Hyperinflation Defined
Hyperinflation is the rapid surge in general prices within a country’s economy. An economy experiences hyperinflation when the price increases hit 50% or more per month over a given period. This type of inflation means salaries and/or wages are hard-pressed to meet the general costs of living.
Additionally, hyperinflation can trigger fear-based responses in society, such as hoarding foods and goods, resulting in supply shortages and further increases in prices.
In dire circumstances, when the cost of living is high and mass hysteria related to devalued currency spreads, people often cash out savings accounts. These significant withdrawals cause a domino effect of cash issues in the banking sector.
What Are the Causes of Hyperinflation?
Luckily, hyperinflation is rare. Nevertheless, several factors can set it off. Wartime is a trigger for hyperinflation because of uncertainty and supply chain disruption. But what are the other causes that may set a country’s economy on this potentially destructive path?
Most people are aware of the hardship posed by the Great Depression, but this historical event is not an example of hyperinflation. The Great Depression occurred when the Federal Bank practiced tight restrictions and didn’t print enough money to keep up with the rate of deflation (the increase of a money’s value).
Hyperinflation is the opposite. It occurs when a country’s central bank produces more money than its economic growth can support. When the central bank adds more money into circulation, its value decreases while prices exponentially rise.
The flood of circulated and undervalued money triggers hyperinflation. Demand-pull inflation describes the increase in the cost of living, where the need/desire for goods outpaces the available supply. When there is plenty of available money, consumers are more inclined to pay more for something which further inflates its perceived value.
If Hyperinflation Happens, What Should I Do?
As stated before, hyperinflation is a rare event that has happened less than 70 times since the 1700’s in various countries. Moreover, we have never experienced total global hyperinflation. Although such an extreme situation is rare, it is still important to know unexpected financial events can occur.
Learning about safe investments and diversifying your savings is a great place to start when financially planning. To prepare for potential hyperinflation, or any economic downturn, take the time to ensure your financial health is in good standing. Living debt-free or with as little debt as possible while having enough savings is an ideal way to be prepared for unexpected or drastic money situations posed by the economy.
If you found this article helpful, check out the School of ACE Blog for more information on financial health and other informative articles.
