Between May 2021 and May 2022, prices increased by 8.6%, which was the highest 12-month increase in the Consumer Price Index (CPI) since 1981. However, the May 2022 CPI data was merely the most recent in a recent line of 40-year highs for the various indicators of U.S. inflation rates.
The world is on edge due to the rising global inflation after years of price stability. Even the crazy first cousin of inflation, hyperinflation, has come up in some circles.
Why Does Hyperinflation Occur?
Hyperinflation is a sudden increase in extremely high inflation, typically occurring at a rate of at least 50% each month. This would equate to an annual inflation rate of around 14,000 percent.
Hyperinflation is also defined as price increases that are “out of control.” You might pay $5 for your morning coffee and $6 for the same cup by the afternoon in a hyperinflationary climate.
According to managing partner of Cornerstone Financial Services Daniel Milan, “Hyperinflation is a rare event and historically has only occurred when a confluence of circumstances converge, such bad monetary policy, corrupt governments, and unstable economies.”
Why Does Hyperinflation Occur?
A nation’s money supply expanding quickly, often as a result of a government printing more and more money, is what leads to hyperinflation. Each unit of currency loses value as more is made available, resulting in higher prices.
According to Milan, hyperinflation frequently occurs when there is a conflict that causes economic unrest and excessive money printing by a nation’s central bank. This causes a mismatch between supply and demand in the economy.
Demand-pull inflation, or hyperinflation, can also develop when people lose faith in a nation’s monetary system or when there is a sudden surge in demand that outpaces supply.
Brian Graeme, manager of alternative manager research at GuideStone Capital Management, claims that when things are scarce, their prices rise quickly.
What Consequences Does Hyperinflation Have?
Hyperinflation can have disastrous impacts on both people and economy. Consumers are unable to afford basic requirements as a result of the rapid increase in consumer good prices relative to wage growth.
According to Brian Stivers, investment advisor and founder of Stivers Financial Services, “Hyperinflation will often cripple the economy and at times precipitate a full collapse of the economic and monetary system.”
He claims there are numerous ways for this collapse to happen. People would start stockpiling goods out of concern for potential price hikes or diminished supply, which would intensify hyperinflation by leading to even more shortages, according to Stivers.
People’s savings in cash become worthless. As a result of the value decline of the loans that banks hold and the withdrawal or cessation of future deposits by depositors, the entire banking system may become unstable. The currency of the country can potentially lose all of its worth.
According to Milan, a country experiencing hyperinflation will frequently experience a severe recession or perhaps a depression.
What Treats Hyperinflation?
Once hyperinflation has set underway, it is difficult to reverse. Different strategies to counteract hyperinflation have been tried by many nations.
The majority of methods, according to Stivers, involve dramatically decreasing government spending. This can cause a great deal of suffering because spending on social programs, the military, and subsidies frequently needs to be reduced.
Another way to stop hyperinflation is to dramatically reduce the money supply. However, this causes loan rates to spike sharply, making it challenging for people to make significant expenditures, like getting a new house or car.
When Ecuador switched from the sucre to the U.S. dollar in 2000, it went along this route. Similar to this, Argentina introduced a new version of their currency connected to the dollar in 1991, aiding in the eradication of hyperinflation.
Does the U.S. face a hyperinflationary future?
Despite rising inflation, analysts do not think the United States is on the verge of hyperinflation.
For two reasons, Graeme is “very convinced” that the United States will not experience hyperinflation: First, the U.S. inflation rate continues to be significantly below than the 50% monthly requirement needed to qualify as hyperinflation.
The present rate is lower than the 50% monthly rate that experts consider to be the cutoff for hyperinflation, despite the fact that the U.S. CPI is currently growing at an annual rate of 8%.
The 1970s and 1980s saw the worst inflation in the United States, with annual CPI inflation reaching 12.4% in 1980. Even then, hyperinflation did not occur in the nation.
The Federal Reserve actively lowering the money supply, which is the second reason why the United States is not on the verge of hyperinflation. This should make it exceedingly improbable that inflation would appreciably rise above current levels, much less become hyperinflation, according to Graeme.
With its separation of powers, the U.S. government structure also makes it improbable that it will ever endure the kind of hyperinflation that is generally seen by nations with authoritarian or repressive regimes.
The Fed is able to act independently from political forces with predetermined agendas because of the Fed’s clear separation of powers from the government, he claims.
