Hyperinflation is where inflation rates spiral out of control, rising rapidly, sharply and unpredictably. When this occurs, the value of a currency sharply decreases while the price of goods and services increases, becoming untenable for consumers and making operating expenses perilously high for businesses. Inflation is measured by the Consumer Price Index (CPI) by the Office of National Statistics. When inflation exceeds 50% in the space of a month, this is classed as hyperinflation.
Hyperinflation has severe economic and political repercussions for a nation, with widespread poverty, the collapse of businesses and financial institutions, political instability and civil unrest ensuing as a result. While inflation is a perfectly natural economic phenomenon, especially in a time of high wages and employment, hyperinflation can be a matter of national crisis and has previously brought about the collapse of national currencies.
Hyperinflation is very rare in the developed world. However, history provides many examples of inflation spiralling out of control.
What causes hyperinflation?
In the wake of a global crisis such as the pandemic, nations around the world have seen how an increase in demand coupled with low economic growth and limited supply can drive inflation. Hyperinflation can be caused during similar circumstances, albeit at a much more extreme level. While hyperinflation is often caused by a convergence of extreme circumstances, contributing factors tend to be:
Demand-pull inflation describes a situation where a nation’s aggregate demand for basics such as food, energy and fuel outstrips the supply. Providers of goods and services then necessarily increase their prices in order to cover their own costs, resulting in less choice and more expense for consumers and businesses alike.
Surplus money supply
In times of recession, central banks will use quantitative easing to introduce more money into the economy. This encourages consumers and businesses to spend and banks to lend money.
However, in order to work, this must be accompanied by more economic activity and growth. If GDP does not increase, businesses increase their prices disproportionately in order to insulate their profit margins and cover their operating costs. This is highly inflationary as consumers have no choice but to spend more money to feed inflation. As a result, central banks must introduce more money into the economy which leads to an inflationary spiral that may result in hyperinflation.
Effects of hyperinflation
Hyperinflation can be disastrous to nations, banks, businesses and consumers. Sharp increases in the cost of essentials can lead to both hoarding and theft of goods. Consumers face a drastic reduction in spending power as the real-terms value of their money plummets. This results in a catastrophic loss of demand for many businesses. Exchange rates become hugely unfavourable, discouraging investment from overseas.
Individuals and businesses may also become unable to meet their tax obligations, leaving governments with less revenue to spend on building essential infrastructures, leading to essential services being slashed.
Will the UK economy go into hyperinflation?
Hyperinflation is very unlikely in developed economies like the UK. While hyperinflationary collapse is unlikely, over a decade of austerity combined with the aftermath of the pandemic and the current energy crisis have led to very high rates of inflation exacerbated by very sluggish growth. Nonetheless, this does not meet the criteria of hyperinflation which requires a rise of 50% in inflation rates within one month.
How do investors guard against inflation?
While investors rarely have to worry about the risk of hyperinflation, high inflation can still prove disastrous to their investments. As such, many will hedge against inflation by investing in commodities, diversifying their portfolios and investing in securities that are linked to inflation.
How do companies weather periods of high inflation?
Inflation can be perilous to the profit margins of businesses. Canny business leaders weather inflationary periods by investing in better business intelligence solutions, identifying areas of wasteful spending and improving efficiency by re-evaluating their processes or integrating automation.