What Is Hyperinflation?

Remember when the weather was the topic everyone brought up when they didn’t know what else to talk about? Well, these days, inflation (the rate that the prices of goods and services go up) has taken the place of weather as the conversation topic of choice. Can you believe this inflation we’re having? It’s nuts!

But hang on to your hats, because there’s a new inflation term to add to your list of conversation starters—hyperinflation. Now that these ridiculously high inflation rates have been around for a while, people are starting to wonder, Is hyperinflation next?

We’ll answer that question in a minute—but first, let’s talk about what hyperinflation even is.

What Is Hyperinflation?

Hyperinflation happens when inflation shoots up really fast and goes insanely out of control for a specific amount of time. So, hyperinflation is just like it sounds—it’s inflation that’s hyper. You know, like when your kids suck down that blue raspberry slush and start running sprints in your living room. Basically, hyperinflation is inflation on a sugar rush.

Talk to most economists and they’ll say that inflation can only be called hyperinflation when prices skyrocket at a rate of 50% each month. Yeah, that’s way worse than the price surges we have going on right now. Don’t believe us? Let’s break hyperinflation down like this: That’s like a gallon of milk going from $3.50 in May to $5.25 in June to $7.88 in July. Sheesh.

Sure, it sounds insane, like something that couldn’t ever happen. But it did happen in Germany after World War I. Still, hyperinflation is a pretty rare thing. Even though the inflation rates these days might feel like hyperinflation in our minds (and wallets), they really aren’t. Crazy, right?

What Causes Hyperinflation?

The cause of hyperinflation usually tracks back to these three things: demand-pull inflation, a rise in a country’s money supply (from printing too much money), and production shortages after a war or natural disaster. Yep, it’s not too pretty. Let’s talk about how each of these things can trigger hyperinflation.

Demand-Pull Inflation 

This happens when the demand for goods goes up but the supply stays the same. If sellers can’t keep up with the supply, then they can raise their prices. This makes the prices pull up to keep up with the demand. When the need for goods is high and the price to buy them keeps going through the roof, it sets up a perfect storm for hyperinflation to come onto the scene.

Rise in Money Supply

Hey—who doesn’t want more money? That can’t be such a bad thing, right? Well, if we’re talking about your own bank account here, sure. But when it comes to a country printing too much money, that’s a horse of a different color. Long story short, an increase in money floating around the economy can make prices rise. America saw a little taste of that back after the stimulus checks went out. But thankfully, we’re only dealing with inflation right now and not hyperinflation.

Big Events

On top of that, hyperinflation can usually be linked back to some kind of big event—think war, economic depression or a natural disaster. Things like that can cause a shortage in production (or even competition), which means there’s less supply and companies know they can raise prices because of it. While things like war and disasters might not directly cause hyperinflation, they sure can kick-start it.

What Happens During Hyperinflation?

You can think of hyperinflation like the B-rated movie sequel to the summer blockbuster about inflation. They’re both bad, super cringey, and no one likes them. Still, the second one is way worse than the first. Here’s why hyperinflation isn’t pretty.  

Your Purchasing Power Disappears

Purchasing power (aka how much value your money has) takes a nose dive during hyperinflation. Because cash loses value by the day during hyperinflation, people are encouraged to spend all their tanking money as fast as they can to stock up on items they need or can trade. Basically, buying clothing or groceries on Tuesday will be cheaper than buying them on Wednesday. And every day you wait to buy those things, the cost just keeps. going. up.

Items Are Worth More Than Cash

Hyperinflation means that the value of your hard-earned dollar bills goes out the window. And when prices are double what they were the day before, people start looking at anything that’s nonperishable as something of value.

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In fact, because the value of the dollar is so low, people start buying items to “invest” their money in. For example, during hyperinflation, someone with a new couch might be better off than someone with $300. Why? Because the money has become pretty worthless compared to having an item of value. 

People Start Stockpiling and Hoarding

We all got a little taste of this back during the pandemic, but even that’s got nothing on hoarding and stockpiling during hyperinflation. Because the value of your dollar tanks so much with hyperinflation (and keeps going down daily), people try to buy up all they can while their buck is still worth something. So, think pandemic panic buying on steroids here. If it sounds scary, that’s because it is. People can get desperate during hyperinflation—and desperation mixed with panic never equals good money decisions.

How to Combat Hyperinflation Before It Happens

First of all, take a breath here and remember the good news: Hyperinflation is not happening right now. Whew! And here’s even more good news, whether we’re dealing with hyperinflation or regular inflation, our principles don’t change. Making the right choices for your money now will pay off—no matter what happens in the future.

Start Saving

Everyone knows saving is a big deal when it comes to your money plan. But most people don’t know how much to save and when to shift their focus.

If you have debt, save up $1,000 (Baby Step 1) before you dive into paying off debt. You’ll be glad to have that starter emergency fund as a buffer between you and the craziness of life. Once you’ve got that under your belt, you can tackle paying off your debt (Baby Step 2). Then, once you’re debt-free (except for your mortgage), you’ll start saving again, but this time it’ll be for your fully funded emergency fund (Baby Step 3). It’s this decked-out emergency fund that will give you the security you need no matter what the inflation numbers say.

Dump Debt

Having debt to your name year after year is like carrying dead weight around with you wherever you go. And can you imagine dealing with debt during hyperinflation? No thanks. Use the debt snowball to pay off your debt now, and your future self will thank you (hyperinflation or not).  

Invest 15% of Your Income

Once you’re out of debt and have a fully funded emergency fund, it’s time to start on your best defense against inflation of any kind—investing 15% of your income. Hyperinflation or not, the reality is that by the time you retire, the cost of a loaf of bread, tank of gas and cup of coffee will all cost more than they do now.

So, the best way to protect yourself against inflation (that’s bound to happen) is to invest your money—the sooner the better. Connect with a SmartVestor Pro to talk through all your investing options. They’ll give you the insight you need to protect yourself against inflation in the future.

Will Hyperinflation Happen?

Do the crazy inflation rates we have today mean hyperinflation is around the corner? Nope. As nutty as inflation is right now, it would still take a lot more than this to cause hyperinflation. Remember, hyperinflation happens when prices increase 50% each month. And even though it might feel like we’re there already—we’re really not.

Food prices have kept a trend of going up about 1% each month in 2022, shelter has inched up about 0.5% every month, and even as fast as gas prices have risen, it still wasn’t anywhere near that 50% mark.¹ From February to March 2022, gas prices went up 18%.² Now, that’s still a big jump, but it’s not 50%.

Even though we don’t have to deal with hyperinflation today, regular ol’ inflation probably has you ready to toss your hands in the air and give up. We get that. Fighting inflation can feel like a losing battle these days, but the truth is, there are ways you can combat inflation. It’s not doomsday. So go ahead and say some choice words about inflation if you need to (we all do). But then pull yourself back together. Sure, inflation might take a bigger bite from your wallet this month than it did last month, but one thing inflation can never take away from you is your hope.

Ready to feel like the sky isn’t falling? Go ahead and do your budget. Seriously. When prices are insane, having a budget gives you the power you need to fight back. Plus, taking a look at your budget can remind you that there are some things out there that you can still control—you know, like your spending. That one is all on you! Our free budgeting tool, EveryDollar, makes budgeting quick and painless while giving you the peace of mind you need.