What is hyperinflation?

In the economy, the hyperinflation is a term referring to inflationary action considered to be out of control or increasing at a much higher rate than would normally occur. The term is somewhat subjective in the sense that there is no firm rule for determining when a situation changes from inflation to hyperinflation. So declaring hyperinflation is often the job of financial analysts and political pundits.

While there are still some doubts about when a situation becomes hyperinflationary, several suggestions have been made. Regardless of which definition is used, most economists agree that hyperinflation exists when there is at least a 100% inflation rate over a period of just a few years. No matter what it's called, inflation anywhere close to that level often results in considerable hardship for the population.

Hyperinflation occurs because a country's currency rapidly loses its value, causing prices to rise in response. Most countries have gone through a period of hyperinflation at some point in their histories. This usually occurs when a government prints much more money than it normally does to make up for a deficit in some other area. The government's response to a lower monetary value is to print even more money, which fuels an ongoing cycle of currency devaluation.

Hyperinflation can cause great difficulties, especially in the short term, because wages may not keep up with the decrease in the purchasing power of the currency. It can also cause a crisis in other sectors, such as banking, where payment rates are often guaranteed to the borrower. So when hyperinflation occurs, the money the bank gets back can be worth much less than the money it originally lent.

There are several factors that can be implemented to prevent hyperinflation from continuing. The government could establish a new base unit. For example, you can decrease your current unit by a factor of 100, making notes that used to be $100 in the old currency being worth $1 in the new currency. However, without doing something to address the root of the problem, hyperinflation will continue to push base units down.

Long-term solutions must include the implementation of a new monetary policy for the country. Interest rates can rise, making it harder to borrow money and therefore increasing its value. In addition, the government could establish new spending policies, which would help reduce the need to print money to cover obligations.