What is Hyperinflation? - Definition, Causes & Effects

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  • 0:01 Definition of Hyperinflation
  • 1:39 Causes & Effects of…
  • 4:12 Lesson Summary
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Lesson Transcript
Instructor: Dr. Douglas Hawks

Douglas has two master's degrees (MPA & MBA) and a PhD in Higher Education Administration.

In 2008, the inflation rates in Zimbabwe were so high that something that cost one dollar today would cost two dollars tomorrow. That's because they were experiencing hyperinflation. In this lesson, learn about the causes, effects, and solutions for hyperinflation.

Definition of Hyperinflation

Inflation is an economic concept that can be defined two different ways, both of which mean the same thing. First, inflation can measure the rate at which prices rise. Remember hearing stories from a grandparent about being able to buy a candy bar for a nickel at the local grocery store when they were younger? That same candy bar probably costs over $1 now. That's because as a general economic rule, prices tend to rise over time.

The second way you can define inflation is the rate at which money loses its value. If you think about it, prices going up and the value of one dollar going down are really the same thing. Inflation is the reason you need more money today than you needed five years ago to buy something.

Hyperinflation, an economic condition most often seen in third-world countries or emerging economies, is when inflation is extremely high and increasing at a rapid pace. The typical inflation rate for the United States, and any healthy economy, is around two percent per year. In 2008, Zimbabwe experienced days when the annualized inflation rate was eight billion percent.

Yes, you read that correctly - eight billion percent. Had that rate continued for an entire year, something that cost $1 on day one would cost $8 billion at the end of the year. Lucky for Zimbabwe, its hyperinflation didn't continue at that rate for an entire year. But, it lasted long enough that Zimbabwe has the distinguished honor of printing the largest denomination of currency ever - a 100 trillion dollar bill. At the time it was printed in 2008, it was worth about $2.80 in American dollars.

Causes and Effects of Hyperinflation

There are two primary causes of hyperinflation, and both of them are basically our own fault. When hyperinflation really takes hold, like the Zimbabwe example in 2008 or the examples of Germany after World War I and Hungary after World War II, it is usually these two factors occurring simultaneously.

The first cause is when the market begins to lose faith in a country's currency. In this case, market means consumers and other users of a currency. Remember, currency is only as good as the government issuing the currency, and if consumers believe that the government won't honor the promissory notes (cash) it is issuing, nobody wants to hold that cash. I'm pretty confident that the U.S. dollar will still be legitimate currency tomorrow, so I can sell you something in exchange for U.S. dollars. But, if we were in Zimbabwe in 2008, I might not have that confidence. Why would I sell you a loaf of bread today if you were giving me something that may be worthless tomorrow?

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