HYPERINFLATION
Hyperinflation is just an advanced level of inflation that tends to quickly destroy the actual value of the local currency since there is a high rise in the cost of all services and products and it causes people to lower their holdings in that specific currency as they choose to participate in foreign currencies which are comparatively more stable!
TYPES OF INFLATION
If the price goes up to 3% a year, it is referred as creeping, from 3 to 10% is called walking and when it exceeds 10% it is referred as galloping. When the rate of inflation is unreal or very high let’s say 30%, it will be termed as hyperinflation.
WHEN HYPERINFLATION TAKES PLACE?
Hyperinflation is a situation where inflation goes fully out of control. Nevertheless it is considered a very rare event, in the 20th century, the event has happened in over 50 countries including big economies like germany and china. In such a scenario, the concept of inflation seems to be meaningless.
Hyperinflation takes place when there is a very high decline in the GDP. However, the supply of money is randomly going up and increasing. It results in a big imbalance between the demand and supply. If the same is left unchecked for a while, the currency value starts falling and the prices of the goods start increasing.
It is often said that this is an unnatural disaster. It often happens when there is a steep currency devaluation and the citizens of the country start losing faith and confidence.
In such a scenario, since people perceive that currency has no value, they will start hoarding commodities and goods which have value. Since the demand for such goods starts going up, prices also rapidly rise, It also has a hidden ripple effect. As the prices are going up rapidly, basic commodities like food and fuel become scarce which kicks on the second cycle of skyrocketing prices of essential commodities.
ROLE OF CENTRAL BANK
In the modern day era, the country’s central bank, in our case its the RBI, is responsible for maintaining inflation under control. It is done by managing interest rates in the economy and getting hold of the money supply. Tightening the money supply helps reduce the inflation while increasing the money supply is coupled with increasing inflation. For instance, in the US, the Federal bank has a target inflation rate at 2% and if it goes beyond this point, the Fed will increase the rates. It will reduce the money supply in the system and lower inflation.
CAUSES AND EFFECTS OF HYPERINFLATION
Land reform programs, economic mismanagement and war funding can be few of the major effects of hyperinflation whereas severe unemployment, drop in life expectancy, persistently very high rate of inflation, widespread diseases and deaths, severe food crisis, etc can be the probable effects on economy and public.
THE CRUX
Overall, inflation is a significant part that the country’s central bank aims to manage. Nevertheless, mismanagement and a wrong turn in the policy making can make it a nuclear bomb in the form of hyperinflation. It can ruin the economy and people will feel worse as part of the process. A lot of wealth is destroyed and the poor are hurt the most in such a scenario.
It results in a huge imbalance between the demand and supply of the economy. If the same is left unchecked and untreated for a long while, the value of currency will start going down drastically. It is often said that hyperinflation is a man-made disaster.
Some of the government policies and measures that can cure or tackle such disasters are having strong policies that can control money printing, creating resources, proactive management by the central bank and not printing evasive funding debt.
The basic and primary job of the central bank here is to keep inflation under control. If the rate of inflation is 10%, you should look for an investment alternative that will return at a rate of more than 10%. So your money grows at a faster rate than the rate at which your money is valued or your purchasing power is going down. Investors should look for avenues to create wealth.
