What is hyperinflation?

Economy
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(WETM) – Twitter CEO Jack Dorsey set the internet abuzz last week when he tweeted that hyperinflation was about to “change everything”.

The face of Tesla and SpaceX, Elon Musk, even posted a response which Dorsey retweeted. Musk said “I don’t know about long-term, but short-term we are seeing strong inflationary pressure.”

Dorsey didn’t specify exactly what he meant, so economists and social media users were left to draw their own conclusions.

What is hyperinflation?

At its most simple, hyperinflation isn’t too different from what it sounds like.

Inflation is when the value or purchasing power of money decreases because of prices of things increase. In other words, money can’t buy as much as it used to.

Therefore, hyperinflation is rapidly increasing prices. An associate dean at Boston College defines hyperinflation as a 50% increase of prices each month. Hypothetically, this would mean the cost of a loaf of bread, for example, would double every couple of months.

A low level of inflation each year—around 2-3%— is a sign of a good economy. But hyperinflation means the prices of goods and services start to grow uncontrollably, outpacing an increase in wages.

Are we headed for hyperflation?

Prices of just about everything from groceries and especially gas have been rising recently. This squeezes consumers, at least temporarily, as a rise in their paychecks usually lags behind increasing costs.

But some economists don’t think Dorsey’s Tweet carries any weight. David Rosenberg told CNBC that the idea we’re about to experience hyperinflation is “totally ridiculous”.

He added that he is worried about current economy and stock market, but he expects us to see a period of deflation (costs decreasing) in the future, not hyperinflation. Investor Cathie Wood made a similar argument. She even thinks we’ll see prices fall after the holiday season.

And it’s important to keep in mind that hyperinflation is extremely rare for developed economies. However, it has happened.

Venezuela is a current example. According to Business Insider, the Venezuelan economic crisis that started in 2016 and is still ongoing, has left many Venezuelan citizens facing shortages and blackouts. The purchasing power of the Venezuelan bolívar has plummeted so much that in 2018, a single roll of toilet paper cost 2.6 million bolívars. That was equal to about $0.40 at the time.

What causes hyperinflation?

Regular inflation can be caused by demand being higher than supply.

But hyperinflation usually happens because of a major trigger—like war, sudden supply chain issues, or social unrest—that results in a drastic and sudden change in supply. Or, a government might have accumulated debt that it can’t pay

A government might try to fix these problems or pay its debt by printing more money. As people spend all this money, demand goes up, so prices have to go up, and thus begins the hyperinflation.

Why is everything so expensive right now?

As for the price increases we’ve been seeing recently, the Associated Press reported in May 2021 that there a few contributing factors.

First, prices went down when the pandemic first hit. Since then, the economy’s been recovering and costs of goods and services have started to rise.

Secondly, there are widespread shortages. These include everything from lumber to semiconductor chips and even chicken wings.

And third, these shortages are exacerbated by supply chain issues and bottlenecks. The AP said that with multiple stimulus checks, consumers are willing to spend more. Suppliers can’t keep up with the speed of the economy’s recovery.

There have been numerous reports of shortages in recent weeks that are expected to continue. Just Google the word “shortage” and you’ll news stories about shortages in just about everything including toys, ammunition, Coca-Cola, and especially labor, like nurses, plow drivers, and school bus drivers.

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