Hyperinflation – Explained for Dummies

What is hyperinflation?

Inflation describes the rise in the general level of the prices of goods and services that are daily or commonly used over a given period of time, such as a month or a year. Put differently, inflation is a measure of the average price change in a basket of selected goods and services over a certain time frame.

Add the prefix hyper (meaning over, beyond, excess, above measure) to the word inflation, and you get the term hyperinflation.

Generally, it is agreed that a period of hyperinflation commences when the inflation rate rises above 50% a month. This guideline was first recommended in 1956 by Phillip Cagan, an economics professor from the U.S.A.

To put the 50%-rule per month in perspective: The inflation rate for South Africa was 2.1% in May 2025 and it increases to 3.2% in July 2025. Both figures mainly due to the effect of the Covid-19 pandemic. In 1960, the country’s inflation rate was measured at 1.29%, and since then the highest inflation rate occurred in 1986, 18.65%.

There are various ways to describe hyperinflation and the detrimental impact of it. For example, hyperinflation is:

• Extreme inflation where price increases are rapid.
• Out of control inflation, implying a situation where the prices of services and goods rise uncontrollably over a defined period of time.
• A situation in which prices of goods and services increase so extremely that consumers cannot buy much with their money.

Causes of hyperinflation

Although hyperinflation can be activated by a variety of reasons, below are two main causes of hyperinflation.

Excessive supply of money

Typically, hyperinflation can occur in times when a country experiences an extended period of a shrinking economy, implying a negative growth rate. Such a period, known as a depression, can continue for years and is characterised by corporate and personal bankruptcies, excessive high unemployment, low gross domestic product (GDP), and a shortage of available credit.

Usually, a government’s response to a depression is to print and infuse more money into a country’s economy. The goal is to allow banks and financial institutions to lend more to individuals and businesses, enabling them to increase spending and investments.

However, if the rise in the money supply is not underpinned by economic growth, as reflected in the country’s GDP, the end result can be hyperinflation.

A vicious cycle develops in which a dwindling economy causes businesses to increase prices in order to survive. With more money to spend, customers are willing to pay the higher prices, which initially triggers inflation. As the economy continues to worsen, businesses invoice more, consumers pay the increased prices, and the country’s central bank – guess what – prints more money, and hyperinflation is on its damaging way.

Loss of confidence in a country’s currency

Reasons, why a loss of confidence in a country’s currency occurs, are, inter alia: times of war, economic turbulence, a government not managed properly, and extremely high inflation rates.

Many times, the lack of confidence results in the outflow of money to other, more stable, countries. When these outflows happen, the country’s currency value declines because residents and foreign investors exchange the country’s currency for another country’s currency.

With the perception that the currency has little or no value, people start to stockpile commodities, foodstuffs, and other goods of value, causing scarcity of items. A high demand for scarce and basic goods, such as food and fuel, triggers higher prices that continue in an upward spiral. To try to stabilise prices and to provide liquidity to the economy, the government is compelled to print even more money, aggravating an already high inflation rate, and leading the country into hyperinflation.

Effects of hyperinflation

Generally, hyperinflation is extremely damaging to a country’s economy and especially the poor.

The effects of hyperinflation are mainly negative to a country as a whole and to its inhabitants as individuals. However, there are some winners in hyperinflation, namely:

• Borrowers with loans – Higher prices make debt worthless in comparison until it is more or less wiped out.
• Exporters – The decreasing value of a local currency causes exports to be cheaper in comparison to the exporters of other countries. Furthermore, exporters earn foreign currency, which rises in value against the declining local currency.

There is a wide variety of negative consequences pertaining to hyperinflation. The following are some of its detrimental effects:

• Hyperinflation quickly devalues the local currency in forex markets, causing importers to quit as the costs of foreign goods increase rapidly.
• It may jeopardise or even destroy a country’s financial system and financial institutions. This scenario is possible due to the following reasons:
• People stop making deposits.
• Foreign investors perceive the afflicted country as a high-risk for investments.
• Loans lend to borrowers to lose value.
• Banks become unwilling to lend money.
• The purchasing power of private and public savings are effectively wiped out.
• Hyperinflation can change a country’s economy to a barter economy, a cashless economy with significant consequences for business confidence.
• People start to stockpile goods, from durable to perishable goods, leading to food supply shortages.
• Unemployment increases because businesses close down, causing residents’ financial situations to deteriorate, many suffering bankruptcies.
• Tax revenues of the government decrease drastically, resulting in failing to provide basic services.
• Typically, a government’s response to hyperinflation is to print and provide more money, fuelling the hyperinflation even more. Eventually, the government decides to change to a more stable foreign currency, such as the U.S. dollar, as a medium of exchange.

Some countries that endured hyperinflation

Quite a number of countries endured hyperinflation throughout history. Here are two cases:

Zimbabwe

From March 2007 to mid-November 2008, Zimbabwe experienced significant hyperinflation. The country’s inflation rate for November 2008 was a shocking 79 600 000 000%, the equivalent of a daily inflation rate of 98%.

The time required for prices to double was just over 24 hours, implying goods and services would cost twice as much the following day.

The Zimbabwean dollar was eventually replaced by foreign currencies, such as the U.S. dollar, the South African rand, and the Botswana pula.

Hungary

Hungry was devastated by World War II, left with a war-torn economy. However, instead of trying to reduce inflation, the government provided new money via the banking sector towards entrepreneurial activities, enabling the restoration of productive capacity and economic activity. Apparently, the plan was a success as price stability finally returned in August 1946.

From August 1945 to July 1946 Hungary suffered staggering hyperinflation. Hungary’s hyperinflation after WWII is still regarded as ‘The worst case of hyperinflation in history.’ At the height of the inflation, prices were increasing at a rate of 150 000% per day.