 DEFINITION |
Hyperinflation refers to an extreme rate of inflation in which the general price level of goods and services—usually measured by the Consumer Price Index (CPI) rises very rapidly. Prices rise so fast that consumers become convinced they will keep rising and try to buy as much as possible today to beat tomorrow’s expected higher prices. Consumers try to spend their money quickly; producers often hoard their goods because they expect to receive higher prices later. Hyperinflation tends to feed on itself, becoming more and more severe.
Hyperinflation can destroy an economy because money ceases to perform its traditional functions as medium of exchange, unit of account and store of value. If hyperinflation persists, people lose confidence in their currency and look for alternative currencies—using more stable currencies issued by other countries. The end result is often monetary collapse and social and political unrest. A very low rate of inflation, on the other hand, is conducive to economic growth.
| EXAMPLES |
In many cases, hyperinflation has occurred in the aftermath of war. Governments often print and circulate paper money to finance budget deficits created during a war. However, when a country fails to produce enough goods and services because of the destruction of resources that takes place in wartime, prices of goods and services increase rapidly. After World War I, the circulation of German marks increased rapidly, and there were shortages of resources to produce goods and services. In the early 1920s, Germany’s extraordinarily high inflation rate crippled the German economy. Workers were paid twice a day and would shop at midday to avoid further depreciation of their earnings.
Canada has not experienced any hyperinflation. During the past decade, Canada’s inflation rate was low, generally in the range of 1 per cent to 3 per cent per year.
| LINKS |
Episodes of Hyperinflation
Source: Economics Department, San José State University
http://www2.sjsu.edu/faculty/watkins/hyper.htm
|
