In economics, hyperinflation is a term referring to inflationary action that is considered to be out of control, or increasing at a rate much greater than it normally would. The term is somewhat subjective in that there is no firm rule for determining when a situation goes from being inflation to hyperinflation. Thus, declaring hyperinflation is often the job of financial analysts and political pundits.
While there are still some questions about when a situation becomes hyperinflationary, a number of suggestions have been made. No matter what definition is used, most economists agree hyperinflation exists when there is at least a 100 percent rate of inflation in the timespan of just a few years. No matter what it is called, inflation anywhere close to this level often results in a substantial hardship for the population.
Hyperinflation takes place because a country's currency loses its value rapidly, causing prices to rise in response. Most countries have experienced a period of hyperinflation at some point during their histories. It often results when a government prints a great deal more money than it normally does to make up for a shortfall in some other area. The government's answer to a lower currency value is to print even more money, which feeds a continuous cycle of currency devaluation.
Hyperinflation can cause great difficulty, especially in the short term, because wages may not keep up with the declining purchasing power of the currency. It can also cause a crisis in other industries, such as banking, where repayment rates are often guaranteed to a borrower. Therefore, when hyperinflation takes place, the money the bank gets back may be worth far less than the money it originally lent out.
There are a number of factors that can be implemented to stop hyperinflation from continuing. The government could set a new base unit. For example, it could decrease its current unit by a factor of 100, making notes that used to be $100 in old currency worth $1 in new currency. However, without doing something to address the root problem, hyperinflation will continue to push the base units lower in value.
Long-term solutions must include the implementation of a new monetary policy for the country. Interest rates could be increased, which would make money harder to borrow and therefore increase its value. Also, the government could set new spending policies, which would help curtail the need to print money to cover obligations.
