Hyperinflation (Economics) - Explained
What is Hyperinflation?
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What is Hyperinflation?
Hyperinflation is exceptionally fast or unmanageable increase in prices (inflation) within an economy. Statistically, hyperinflation occurs when a country's inflation rate exceeds 50 percent over the period of a month.
What Causes Hyperinflation?
Hyperinflation is generally caused by a disproportionate amount of spending or consumption by the populace. The heavy increase in spending is often the result of an excess of capital in the economy.
How is Capital Introduced into the Economy?
Additional capital is introduced into the economy through:
- government spending,
- tax reduction, and
- easy monetary policy at the central bank.
The effect of an excess of currency is amplified when it is accompanied by poor gross domestic product (GDP) growth, thus leading to a huge disparity between supply and demand of currency.
Note: During military conflicts, hyperinflation may be brought about by diminishing faith in a currency's capability to preserve its value in the aftermath of the conflict.
Why is Hyperinflation Bad?
Hyperinflation greatly reduces the value of currency and renders it unstable as a medium of exchange. This, in turn, causes individuals to hold value in alternative forms (such as personal or private property).
The rapid expenditure or exchange of currency for alternative assets amplifies the reduction of currency value, as prices rise for the goods based upon the elevated demand. Unless controlled, hyperinflation will cause unnatural spike in prices of commodities following the fall of the currency.
- Core Inflation
- Cost Push Inflation
- Demand Pull Inflation
- Wage Push Inflation
- Inflation Spiral (Wage-Price Spiral)
- Consumer Price Index
- Buying Power Index
- Breakfast Index
- Capital Goods Price Index
- Farm (Agricultural) Price Index
- Harmonized Index of Consumer Prices
- Repeated Sales Method (Real Estate)
- Pigou Effect
- Hyperinflation (Economics)
- Inflation and Redistribution of Purchasing Power
- Inflation Blurs Price Signals
- Inflation Affects Long-Term Planning
- What are the Benefits of Inflation?
- Cost of Living Allowance
- Adjustable Rate Mortgage