In economics, hyperinflation is inflation that is very high or "out of control". While the real values of the specific economic items generally stay the same in terms of relatively stable foreign currencies, in hyperinflationary conditions the general price level within a specific economy increases rapidly as the functional or internal currency, as opposed to a foreign currency, loses its real value very quickly, normally at an accelerating rate. Definitions used vary from one provided by the International Accounting Standards Board, which describes it as "a cumulative inflation rate over three years approaching 100% (26% per annum compounded for three years in a row)", to Cagan's (1956) "inflation exceeding 50% a month." As a rule of thumb, normal monthly and annual low inflation and deflation are reported per month, while under hyperinflation the general price level could rise by 5 or 10% or even much more every day.
A vicious circle is created in which more and more inflation is created with each iteration of the ever increasing money printing cycle.
Hyperinflation becomes visible when there is an unchecked increase in the money supply (see hyperinflation in Zimbabwe) usually accompanied by a widespread unwillingness on the part of the local population to hold the hyperinflationary money for more than the time needed to trade it for something non-monetary to avoid further loss of real value. Hyperinflation is often associated with wars (or their aftermath), currency meltdowns, political or social upheavals, or aggressive bidding on currency exchanges.
In 1956, Phillip Cagan wrote The Monetary Dynamics of Hyperinflation, generally regarded as the first serious study of hyperinflation and its effects. In it, he defined hyperinflation as a monthly inflation rate of at least 50%. International Accounting Standard 1 requires a presentation currency. IAS 21 provides for translations of foreign currencies into the presentation currency. IAS 29 establishes special accounting rules for use in hyperinflationary environments, and lists four factors which can trigger application of these rules:
1. The general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency. Amounts of local currency held are immediately invested to maintain purchasing power. 2. The general population regards monetary amounts not in terms of the local currency but in terms of a relatively stable foreign currency. Prices may be quoted in that foreign currency. 3. Sales and purchases on credit take place at prices that are increased by an amount that will compensate for the expected loss of purchasing power during the credit period, even if the period is short. 4. Interest rates, wages and prices are linked to a price index and the cumulative inflation rate over three years approaches, or exceeds, 100%.
Root causes of hyperinflation
By definition, hyperinflation is a rapid increase in Nominal GDP (the Money Supply multiplied by the velocity of money) without a corresponding increase in real output (see Equation of exchange). This is often caused by decisions on the part of the central bank to increase the money supply much more than markets had previously expected, often when money is printed to finance government spending. This results in a fall in the demand for money relative to its supply, which in an extreme case can grow into a complete loss of confidence in the money, similar to a bank run. This loss of confidence causes a rapid increase in velocity of spending which causes a corresponding rapid increase in prices. For example, once inflation has become established, sellers try to hedge against it by increasing prices. This leads to further waves of price increases. Hyperinflation will continue as long as the entity responsible for increasing bank credit and/or printing currency continues to promote excessive money creation. In severe...