What is hyperinflation?
24 Aug 2021
While hyperinflation is rare it has occurred many times throughout history and even as recently as 2016 in Venezuela. Hyperinflation can also adversely affect investors. So, what is it exactly and why does it occur?
What is hyperinflation?
Inflation is the measure of the pace of rising prices for goods and services, and hyperinflation occurs when inflation rises rapidly and excessively. Typically when prices rise 50% over a month period and continues to rise that is considered hyperinflation. When hyperinflation occurs a loaf of bread could be one price in the morning and another price in the afternoon.
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Why does hyperinflation happen?
Hyperinflation usually stems from two main issues, which are often linked and happen simultaneously. The first occurs when the printing of money doesn’t match the rate of economic growth. Governments may choose to do this to cover the cost of their spending. However, it creates a large supply of money with little demand for it, leading to the real value of the domestic currency eroding at a rapid rate.
The second root cause is called demand-pull inflation, and it occurs when there is a surge of demand that outstrips supply. As the value of a currency falls, prices increase as those who hold the currency try to get rid of it at a rapid rate, knowing that they can buy more with it today then they can tomorrow.
Political instability and war can also cause hyperinflation, the value of a currency can fall when people lose confidence in the government that backs the currency.
How to measure hyperinflation?
The Consumer Price Index (CPI) is used to track inflation, it measures household inflation. The Australian Bureau of Statistics will report on the CPI each quarter. On average the quarterly inflation rate from July 2018 to today was 1.5%. Although, in the latest quarter inflation rose to 3.8%. However, this is still far cry from hyperinflation in which the inflation rate can grow 50% in a month.
Signs that inflation will rise
According to Morning Star, there are some signs that you can look for that indicate a rise in inflation. One sign is a rise in interest rates. As high prices for goods and services can lead to hardship for some consumers the Reserve Bank will generally try to avoid this. They will typically raise interest rates in an attempt to slow down the economy and in turn slow down inflation.
Another key area to keep an eye on is the price of raw-materials, such as copper and lumber. They are economically sensitive materials that are generally needed for new housing construction, for example. If the price of these base commodities rises sharply it could mean that demand outstrips supply and high inflation is on the cards. A rise in price for precious metals like gold and silver is also another indication of a rise in inflation.
How does hyperinflation affect investors?
Hyperinflation can be devastating for investors. The goal of most investors is to get ahead of inflation, which can be almost impossible to do during times of hyperinflation. Additionally, when hyperinflation occurs it is typically at a time of poor economic growth or during a depression -both of which are not ideal environments for investors. This is because it typically leads to low earnings forecasts for companies and lower equity prices for investors.
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This article was reviewed by our Content Producer Isabella Shoard before it was updated, as part of our fact-checking process.
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