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What is hyperinflation and why are people worried about it?

·News Editor
·5-min read
Australian dollars being printed.
Is inflation here to stay? And why are some people in the US talking about hyperinflation? (Source: Getty)

For more than a decade economists in the developed world have been left wondering; what ever happened to inflation?

Now it's become fashionable in some circles to predict hyperinflation. Jack Dorsey, the CEO of Twitter and payments technology firm Square, drew scorn last week for doing just that.

"Hyperinflation is going to change everything. It’s happening," the well-known cryptocurrency advocate claimed.

"It will happen in the US soon, and so the world."

Michael Burry, the money manager immortalised in Michael Lewis' The Big Short, this year compared the United States to Weimar Germany in the early 1920s while conservative politicians running for the US senate tweet as if hyperinflation is already here.

While inflation has shown serious signs of life, hyperinflation is tantamount to complete socio-political collapse.

Here's why you absolutely shouldn't expect it to happen.

What is hyperinflation?

Hyperinflation occurs when price increases in an economy accelerate rapidly and spiral out of control, quickly reducing the buying power of the currency to make it practically worthless.

"Hyperinflation is defined pretty rigorously. It's a bit pedantic, but hyperinflation is prices rising by more than 50 per cent per month," Associate Professor William Coleman from the ANU school of economics told Yahoo Finance.

"I mean that's pretty extreme."

A Berlin bank manager counts a stack of bank notes.
A Berlin Bank stacks notes to the ceiling. (Source: Getty)

Hyperinflation typically comes about when there is widespread political unrest and when governments try to print their way out of massive government debts.

"The root of hyperinflation is political collapse," Coleman said.

"The risk of hyperinflation in the short to medium term in the developed world is zero."

What countries have experienced hyperinflation?

There's been more than a handful of instances where countries have been swamped by hyperinflation in the past one hundred years.

Germany in the early 1920s is among the most well known examples, with the turmoil of the time helping lead to the rise of Hitler.

China in the 1940s was forced to introduce a new currency after an explosion of hyperinflation during the latter years of its civil war.

"In June 1948, a sack of rice had cost 6.7 million yuan; within a few weeks the price had reached 63 million," Helen Zia wrote in Last Boat out of Shanghai.

Hungary in the post World War II period holds the record for the most extreme monthly inflation rate ever at a ming-boggling 41.9 quadrillion per cent in July 1946. That meant prices doubled every 15 hours.

Yugoslavia in the early 1990s suffered hyperinflation, as did Zimbabwe more than a decade later. Argentina and Brazil have also grappled with hyperinflation.

Venezuela is still dealing with the scars of hyperinflation. It declared a state of emergency in 2016 when the yearly inflation rate hit 800 per cent. Two years later, it was estimated at 80,000 per cent. Like others before them, the country introduced a new currency last month.

"These are all societies in civil war, or on the verge of civil war," Coleman said. "That's when hyperinflation breaks out."

A bus driver receives 500,000 bolivars.
A bus driver receives 500,000 bolivars from a passenger while he collects the fare of people who line up to get on board in Caracas, Venezuela in September 2021. (Source: AFP)

What is happening with inflation?

In Australia, the consumer price index – one measurement of inflation – saw prices rise 0.8 per cent in the September quarter, according to data released last week from the Australian Bureau of Statistics.

In the past 12 months, consumer prices have risen by 3 per cent, driven by a leap in petrol and property prices.

"That's not surprising given that [inflation] was starting off quite a low base and the economy is picking up after being shutdown for long periods," Professor Kevin Fox from the UNSW School of Business told Yahoo Finance.

Spurred on by supply chain disruptions during the pandemic, the expectations of price rises among Aussie consumers spiked to a seven-year high last week.

However Fox believes some of the inflationary pressures will largely be transitory as people come out of lockdown and shift from buying physical products (like exercise equipment) to services.

"Services typically don't have the supply chain issues that physical goods have," he explained.

Whether the recent uptick in inflation seen in many developed countries is transitory or not is the subject of fierce debate right now, but the Reserve Bank of Australia has been firmly in the transitory camp to date.

Is our understanding of inflation broken?

Economists still don't have a rock solid understanding of inflation.

The monetary theory of inflation asserts that growth in the money supply is the cause of inflation but with governments injecting trillions into their economies since the GFC with little inflation to show for it, that theory has fallen on hard times.

"It's a theory that has spectacularly not worked over the past 14 years. We've been flooded with money since 2008 and there's barely been any inflation until the past year," Coleman said.

"So the old theories about connecting money to inflation aren't really working ... but there's no alternative theory to go on."

Fox believes it's simply "a matter of scale".

"If you print enough, then you will get hyperinflation – but we're not anywhere near close to that in any of the industrialised countries," he said.

One thing that could keep inflation around for a little while longer is a change in expectations among consumers, leading them to spend their money more quickly before it loses purchasing power.

"The key thing that could drive inflation is expectations," Coleman said. "As soon as people expect it won't be transitory, [then] it won't be transitory."

But wage growth would need to come along for the ride, and that continues to be sluggish at around 1.7 per cent a year in Australia.

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