Inflation Gone Wild: A Deep Dive into Hyperinflation's Dark Side

 Imagine if you could travel back to the beloved days of 2016. What would you do? Many of us would jump at the chance to relive school days, reconnect with friends, and revisit those catfights.

Picture this : four friends gathering at KFC with just Rs. 200. Back then, we could feast on snacks priced around Rs. 80 and delight in the WOW menu items for only Rs. 39. It was a frugal yet satisfying outing!

Now, fast forward to 2024. The scene has changed dramatically. A standard Zinger burger now costs Rs. 135, meaning our budget can barely feed one person at KFC. Even our favorite Hide and Seek or Dark Fantasy biscuits, once just Rs. 20, have doubled to Rs. 40.

This stark shift highlights the reality of inflation. When prices rise consistently over time, it’s a normal economic phenomenon. However, when prices increase at an alarming rate—say, doubling in a short period—we enter a more extreme realm known as hyperinflation.

Decoding Hyperinflation:

In 1956, Philip Cagan, an associate of the American National Bank, published a research paper that examined the impact of prices rising significantly in a short timeframe. This work led to the origin of the term “hyperinflation.” An economy is considered to be experiencing hyperinflation when the monthly inflation rate exceeds 50%, resulting in annual inflation rates soaring to 100%, 1,000%, or even an astonishing 100,000%.

To further simplify this concept, imagine that the same loaf of bread you bought in the morning for ₹45 costs ₹90 by evening. Noted economist John Maynard Keynes documented the mind-boggling hyperinflation in the Weimar Republic, where prices skyrocketed by an incredible 79,999,999,900%.

Crippling Economies in a Modern World:

The 21st century has witnessed everything from technological advancements to the economic downturns caused by the COVID-19 pandemic. Such events have affected the financial dynamics of countries, including developed economies like the UK, Italy, and Japan, which have faced recessions.

A common argument might be that governments should cut interest rates and increase the money supply to encourage spending and correct economic imbalances. However, let’s consider a few case studies of hyperinflation before drawing conclusions:

Country	Hyperinflation Period	Highest Inflation Rate	Main Cause for Hyperinflation	Consequences	Corrective Measures
Weimar Germany	Early 1920 – 1923	29,500% p.m.	War damages Money printing	Unemployment and Adolf Hitler's party crash	New currency was introduced – Rentenmark
Hungary	1945 – 1946	41.9 quadrillion % p.m. (Prices doubled every 15 hours)	War damages Money printing	Currency Collapsed	New Currency Introduced - Forint
Yugoslavia	1990 - 1994	5 quadrillion % p.a.	Political Instability and money printing	Currency Collapsed,	New Dinar Introduced
Zimbabwe	2000 – 2008 (Facing inflation at lesser rate currently)	79.6 billion p.m.	Too much money printing and Land Reforms	Currency was useless,	had to rely on foreign currency
Venezuela	2010 – present	130,060 % (by 2018)	Poor Policies and sanctions, so much reliance on oil	Currency Devalued	New government initiative launched.

Many more instances of hyperinflation exist globally, but these key examples highlight the issue. Even Argentina, where footballer Lionel Messi hails from, is grappling with hyperinflation at an astonishing 211.4%. Javier Milei, a presidential candidate, has pledged to address this economic crisis in his campaign.

Key Drivers of Hyperinflation:

Hyperinflation doesn’t have a single cause. Instead, it arises from a disequilibrium among various market variables. According to the World Bank’s Cost and Stabilizing Inflation report, some key factors include:

1. Increased money supply due to uncontrolled deficit financing.
2. Piling government debts and deficits.
3. Collapse of the tax revenue structure due to irrational taxation policies.
4. Currency devaluation from a lack of monetary policy control.
5. Demand-pull inflation, where aggregate demand exceeds supply, forcing government spending.

Countries that print excessive money without controlling its supply face a high risk of hyperinflation. This creates a domino effect marked by skyrocketing prices and consumer stockpiling in anticipation of further increases.

Implications and Consequences of Hyperinflation:

 1. Sustained price rises impact the standard of living and consumer behavior:

• Impact on Goods Market and the Economy
• Stockpiling Goods: Consumers hoard essential items to avoid future price increases, leading to shortages.
• Emergence of Informal Markets: Illegal traders exploit the situation, charging higher prices for goods.
• Reliance on Foreign Remittances: As inflation erodes local currency value, people depend on remittances from abroad.
• Loss for Lenders: Lenders lose money as repayments lose value due to hyperinflation.

2. Impact on Consumer Psychology:

1. Anxiety and Uncertainty: Individuals face stress as they struggle to maintain purchasing power.
2. Chronic Stress: Economic instability reduces community engagement and helpfulness.
3. Social Tensions: Wealth disparities grow, exacerbating poverty levels and social unrest.

The Way Forward:

1. To combat hyperinflation, governments and central banks should adopt a balanced mix of fiscal and monetary policies. Some potential measures include:
2. Monitoring currency markets to withstand shocks and volatility.
3. Increasing government spending while adjusting tax revenues to manage aggregate demand.
4. Introducing price controls, although this can lead to hoarding and black markets.

The Bottom Line:

While the theoretical possibility of hyperinflation exists in the wake of the global economic slowdown post-COVID, India, as of 2024, is far from such a situation. Our exports have surged from $159 billion to $458 billion between 2017 and 2024. Despite some dissatisfaction with the new tax regime, we have a strong, stable government focused on development.

So, should we sit back and relax? Not quite. Our inflation rates stand at 4.63% (Consumer Price Index) and 2.8% (Wholesale Price Index) as of the 2024-25 budget, with a target of 4.5% or lower.

As youth, we should continue researching and seeking answers to our questions. Before we end, ponder this: “How come the value of Parle-G biscuits is still Rs. 5, as it was in the 90s?”

Keep thinking until we return with another intriguing topic in our next blog!

References:

• https://www.citeco.fr/10000-years-history-economics/industrial-revolutions/hyperinflation-in-germany
• Phillip Cagan, "The Monetary Dynamics of Hyperinflation," in Milton Friedman (ed.), Studies in the Quantity Theory of Money (University of Chicago Press, 1956).
• https://www.ft.com/content/7795808f-de14-4507-9d51-b57e64c7ed68
• Kathleen, D., Vohs., Nicole, L., Mead., Miranda, Goode. (2006). The Psychological Consequences of Money. Social Science Research Network
• Catherine, Larochelle., Jeffrey, Alwang., Nelson, Taruvinga. (2014). Inter-temporal Changes in Well-being During Conditions of Hyperinflation: Evidence from Zimbabwe. Journal of African Economies,  doi: 10.1093/JAE/EJT028
• https://www.bbc.com/news/world-africa-68736155
• https://www.bbc.co.uk/bitesize/guides/z9y64j6/revision/5
• https://www.netsuite.com/portal/resource/articles/business-strategy/hyperinflation.shtml
• https://www.researchgate.net/publication/267968728_Hyperinflation_A_Theory_On_The_Ignorance_Concerning_Money_And_Interest
• Amadeo K(2021), Hyperinflation: Its Causes and Effects With Examples
• González J(2009), Hyperinflation:  A Theory On The Ignorance Concerning Money And Interest.    International Business & Economics Research Journal
• https://www.researchgate.net/journal/International-Business-Economics-Research-Journal-IBER-2157-9393?_tp=eyJjb250ZXh0Ijp7ImZpcnN0UGFnZSI6Il9kaXJlY3QiLCJwYWdlIjoicHVibGljYXRpb24ifX0.