Learn about hyperinflation

Inflation is the rise in the prices of goods over a period. When the condition of inflation occurs in an economy, it minimises your power to buy goods and services. Inflation is the increase in the prices of an economy for a specified time. 

Every time the prices in an economy increase, every currency unit buys comparatively lesser goods and services. Also, hyperinflation directly affects the purchasing power of consumers. 

What is Hyperinflation? 

• Hyperinflation, or rising inflation, is when the prices of goods and services increase uncontrollably in an economy for a defined period. 
• Out-of-control inflation is the next stage of inflation which requires rapid solutions.
• Often, inflation is known as hyperinflation when the inflation rate increases by more than 50% in a month. There are several causes of hyperinflation. These include – 

Demand-pull Inflation 

When the aggregate demand in the economy increases and becomes more significant, then the ability of the economy to fulfil these demands leads to demand-pull inflation. There are several causes of this type of inflation: 

• Increase in the money supply in the economy 
• A rise in the forex reserves 
• Due to fiscal stimulus
• Government spendings
• Depreciation of rupee
• Increased borrowing
• Low unemployment rate

Cost-push Inflation 

Because of the rising wages and materials, there is an increase in the prices of the end goods. Consumers often pay these costs. There are several reasons why cost-push inflation occurs in an economy. Here is the list of causes of cost-push inflation:

• Speculation and hoarding of commodities
• Fluctuation in the prices of crude oil 
• Low growth in the agricultural sector
• Defects in the food supply chain
• Rise in the interest rates by RBI
• Increase in the prices of inputs
• Defects in the Supply chain
• Currency depreciation 
• The rise in indirect taxes
• Food Inflation

Devaluation 

Devaluation is a downward adjustment in the exchange rate of a company. It leads to a lower value for the country’s currency. If the currency gets devalued, the country’s export rate minimises, encouraging governments to go for more devalued goods. 

Increased money supply 

The oversupply of paper currency refers to the total money, including notes, coins, and bank accounts, in circulation in an economy. If there is an oversupply of paper currency more than the production rate, it gives rise to hyperinflation in an economy. Through Open Market Operations or OMO, the money supply increases in an economy. 

Increased wages 

Wages refer to the salary paid to workers on an hourly basis. If there are rising wages, businesses tend to increase the prices of the final commodity or either they have to live with low margins, which is an expectation in most cases. Hence, the condition of hyperinflation occurs in the economy. 

Effects of Hyperinflation 

Rising inflation is an extreme condition that essentially devalues the currency present in the foreign exchange market. As a result, the holders of these currencies tend to lower their holdings and prefer switching to other and stable currencies present in the market. 

Intending to avoid scenarios where individuals will have to pay higher for goods, they start to invest in durable goods, including equipment, machinery, jewellery, etc. 

In case the condition of hyperinflation exists for a longer time, people start to collect perishable goods. This practice goes on until and unless hyperinflation calms down. Note, if this condition prevails for a longer time, it can even lead to economic collapse. 

Other effects of hyperinflation include 

• Effects of government finance – During high inflation, the government revenue increases as they get revenue in different forms. These include tax, sales tax, excise duties, and so on. However, the government is expected to spend more; as a result, public expenditure boosts. But the rise in prices reduces the burden of public debt.
• Effects on the growth – It is believed that mild inflation contributes to economic growth, and hyperinflation can negatively affect the development of an economy. Prolonged hyperinflation can lead to economic collapse or economies shifting to the barter system. 

Conclusion 

Hyperinflation is an extreme case of inflation where the prices of goods and services increase uncontrollably in an economy in a defined period. In such situations, the costs of the goods increase by more than 50%, which minimises the purchasing power of the people. 

There are several reasons why an economy undergoes hyperinflation. One primary reason is devaluation, where there is an oversupply of paper currency. However, its effects are experienced by all sectors.