- Hyperinflation has been around since the French Revolution.
- But with high inflation worldwide, should we be worried about it in 2022?
- Inflation is at a 40-year peak in the US and the UK.
- The Bank of England has warned that UK inflation may reach 10% in the next few months.
The last time inflation levels were this high in the US and Europe, flared trousers were in, roller discos were all the rage, and no one had heard of Steve Jobs. It’s safe to say that, for many people, high inflation is something new.
Take the US. Today, inflation is an important news item as the country has had its highest inflation reading in decades. While the rate has recorded a modest decline recently, it remains at a 40-year peak, hovering around 8.3%-8.5%. The UK is also experiencing an unwelcome 40-year record, so much so that the Bank of England has warned inflation may top 10% within months.
And experts predict tough times. In its Chief Economists Outlook 2022, the World Economic Forum reports: “Overall, inflation expectations are highest for the US, followed by Europe and Latin America, with 96%, 92%, and 86% of survey respondents respectively projecting inflation to run either high or very high in 2022.”
What’s going on?
While different countries have different economic climates, several common factors have increased inflation. Soaring energy bills are the biggest culprit, driven partly by the war in Ukraine. Then there’s the runaway rise in fuel prices, not to mention the upsurge in global food prices and increased costs of raw materials. Add the effect of climbing interest rates on mortgage payments, squeezed salaries, and a worldwide economy clawing its way back from a pandemic, and you have a perfect storm.
So, should we be worried about the grim prospect of hyperinflation? Let’s not get ahead of ourselves.
Hyperinflation – an explanation
Hyperinflation goes beyond inflation. In a nutshell, it is incredibly rapid inflation. If you lived in a country gripped by hyperinflation, you’d know about it. It refers to a situation where the prices of goods and services rise uncontrollably over a defined period. Generally, the term is used when the inflation rate increases by more than 50% a month.
Typically, hyperinflation is triggered by rapid growth in the money supply. This could be caused by a government printing money to pay for its spending or what’s known as demand-pull inflation. The latter happens when a swell in demand exceeds supply, launching prices higher.
What does this mean? In short, when more money is funneled into circulation, the actual value of the country’s currency can plummet. Therefore, hyperinflation can be devastating when measured regarding the impact on people’s lives. Prices of ordinary and essential goods, such as bread, coffee, and tea, can rise daily.
How many times has this happened before?
To find the world’s first instance of hyperinflation, it must go back hundreds of years. Depending on which version of history you believe, it could be argued that one of the earliest examples of hyperinflation took place in the Netherlands in 1634, when “Tulipmania” took hold in the European nation.
It is more readily accepted that France endured the world’s first recorded hyperinflation during the French Revolution in the late 18th century when monthly inflation topped 143%.
Nevertheless, perhaps the most well-known example of hyperinflation occurred in the 1920s when, following World War I and crippled by reparation debt, Weimar Germany saw its monthly inflation rate reach 29,500% in 1923, according to the CATO Institute.
How to Prepare for Hyperinflation
Remembering that hyperinflation doesn’t happen very often, especially in developing countries where a central bank focuses on reigning in and controlling inflationary periods is critical. However, there are some actions you can take to reduce the effects, typically high inflation, on your portfolio.
A balanced and diversified portfolio can help you reduce losses through inflationary periods. Commodities and real estate can reduce the adverse effects of inflation because they tend to increase in value during these times. Treasury Inflation-Protected Securities (TIPS) can hedge against rising inflation because the principal you have invested in a TIPS adjusts with inflation.
Mutual funds and exchange-traded funds that practice inflation swaps can also be used to combat the effects of inflation on your portfolio.
Real-world examples of Hyperinflation
Yugoslavia
One of the more devastating and prolonged episodes of hyperinflation occurred in the former Yugoslavia in the 1990s. On the verge of national dissolution, the country had already been experiencing inflation at rates that exceeded 76% annually.
In 1991, it was discovered that the leader of the then-Serbian province, Slobodan Milosevic, had plundered the national treasury by having the Serbian central bank issue $1.4 billion of loans to his cronies.
The theft forced the government’s central bank to print excessive amounts of money to take care of its financial obligations. As a result, hyperinflation quickly enveloped the economy, erasing what was left of the country’s wealth and forcing its people into bartering for goods. The inflation rate nearly doubled daily until it reached an unfathomable rate of 313,000,000% per month.
The government quickly took control of production and wages, which led to food shortages. As a result, incomes dropped by more than 50%, and output crawled to a stop. Eventually, the government replaced its currency with the German mark, which helped to stabilize the economy.
Hungary
Hungary experienced hyperinflation after World War II. At the peak of Hungary’s inflation, prices rose 207% daily.
Zimbabwe
In March 2007, Zimbabwe entered a period of hyperinflation that equaled a daily rate of inflation of 98% until early 2009.5 The country’s hyperinflationary period began in 1999 after the country experienced several periods of drought and the following reduction in GDP.
As a result, the country was forced to borrow more than it produced, and the government began spending more. It increased taxes to pay bonuses to independence war veterans, became involved in a war in the Congo, and borrowed from the International Monetary Fund to improve development and living standards for citizens.
The government began printing money to pay for the expenses, causing an inflationary rise, and residents began to move to other countries to escape the economy. By 2010, nearly 1.3 million people had left, and the economy was in shambles.
What Will Happen If There Is Hyperinflation?
Hyperinflation doesn’t occur without any indication. If economists see signs of hyperinflation—well before inflation reaches 50% in a month—the Federal Reserve will implement any monetary policy tools allowed to ensure it doesn’t happen. In the past, Federal Reserve chair Paul Volcker raised rates to more than 21% to combat a rate of more than 14%—leading to two recessions before inflation came under control.
Will the U.S. Go Into Hyperinflation?
It is doubtful that the U.S. will experience hyperinflation unless economic circumstances become very dire. The Federal Reserve and government have many tools at their disposal that can prevent hyperinflation from occurring.
What Was the Worst Hyperinflation in History?
Hungary experienced hyperinflation from August 1945 to Jul 1946, with a daily inflation rate of 207%.
The Bottom Line
Hyperinflation is when a country’s inflation rate rises 50% in one month. It is a concern if a country is in a situation where it cannot afford to meet its obligations or experiences circumstances that affect its ability to produce goods and services. Thus, hyperinflation is not something that occurs very often. Nevertheless, hyperinflation has happened 43 times in 28 countries since 1796.
Remedies and solutions
So, what can be done about hyperinflation? Unsurprisingly, it’s not easy to overcome. Assorted remedies have been administered, from drastic tax reforms to slashing government expenditure and introducing new currencies. Results have varied, as has the time taken to resolve the situation.
Looking at 2022, there’s probably no need to panic. Increasing inflation can lead to pecuniary measures, but hyperinflation is essentially a situation where the currency is meaningless. As things currently stand, hyperinflation seems unlikely.
