# Hyperinflation Explained: Causes, Effects & How to Protect Your Finances

## What Is Hyperinflation?

Hyperinflation occurs when a country's [inflation](https://www.investopedia.com/terms/i/inflation.asp) rate surpasses 50% each month, leading to uncontrollable price surges that erode purchasing power and destabilize economies. While rare in developed nations, historical episodes in countries like Yugoslavia, Zimbabwe, and Hungary reveal how excessive money supply and demand-pull inflation can trigger such crises. Understanding these dynamics is essential for protecting your finances.

### Key Takeaways

*   Hyperinflation is when a country's inflation rate exceeds 50% per month, causing rapid price increases for goods and services.
*   Excessive money supply not backed by economic growth and demand-pull inflation are key triggers of hyperinflation.
*   Hyperinflation erodes purchasing power, making it difficult for consumers to buy essentials and destabilizing economies.
*   Historical cases of hyperinflation, such as in Yugoslavia and Zimbabwe, illustrate the severe economic and social impacts.
*   Diversified investment portfolios, including commodities and Treasury Inflation-Protected Securities (TIPS), can help mitigate hyperinflation's impacts on personal finances.

![Hyperinflation](https://www.investopedia.com/thmb/aeYOQyA2xDxB8XWU4ggNbCOii9k=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Hyperinflation-V4-2899b6434a3a4cee9067e500a3e8f5e0.jpg)

*— Investopedia / Matthew Collins*

## How Hyperinflation Is Measured and Monitored

The Bureau of Labor Statistics uses the [Consumer Price Index](https://www.investopedia.com/terms/c/consumerpriceindex.asp) (CPI) to measure inflation and the dollar's purchasing power in the U.S. The CPI is an index of the prices for about 94,000 commodities and services: approximately 8,000 rental housing unit quotes and prices for airline fares, apparel, household goods, prescription drugs, used automobiles, and postage.

The Federal Reserve generally strives to maintain what it calls a [healthy inflation rate](https://www.investopedia.com/articles/personal-finance/073015/understand-different-types-inflation.asp) of around 2% over the long term. Hyperinflation is an extreme case of inflation. Inflation higher than 5% is considered high inflation. Inflation of 50% or more per month is considered hyperinflation.

> **Fast Fact**
>
> The U.S. inflation rate measured by the CPI averaged about 2.5% per year from 2013 through 2021. It reached a peak of 13.54% in 1980. It was 4.11% as of July 2024.

During hyperinflation, prices can rise daily or weekly, significantly increasing costs for necessities. Imagine that you always buy the same items at the grocery store. Your grocery bill would rise from $500 one week to $675 the next week then as high as $911 the week after that if the economy were experiencing a rising inflation rate of 5% per day.

## Key Causes of Hyperinflation: Money Supply and Demand-Pull Inflation

Various factors can trigger hyperinflation.  

### Excessive Money Supply

Central banks generally control the circulating supply of money. Central banks can increase the amount of money circulating in circumstances that historically warrant an increase in the money supply such as a [recession](https://www.investopedia.com/terms/r/recession.asp) or [depression](https://www.investopedia.com/terms/d/depression.asp). The intent behind this action is to encourage banks to lend and consumers and businesses to borrow and spend.  

Hyperinflation can happen if the money supply increases without [GDP](https://www.investopedia.com/terms/g/gdp.asp) growth, forcing businesses to raise prices to stay profitable.  

Consumers pay higher prices and feed inflation when they have more money. If economic output shrinks and inflation rises, companies charge more, consumers pay more, and the central bank prints more money. A cycle of increasing inflation rates occurs, leading to hyperinflation.

### Demand-Pull Inflation

Demand-pull inflation happens when demand exceeds supply. This increases prices rapidly because there aren't enough goods and services available to meet the increase in the overall demand from consumers and businesses.

> **Important**
>
> Hyperinflation can occur when many circumstances and poor monetary decision-making come together.

## How Hyperinflation Affects Daily Life and the Economy

Hyperinflation can cause several adverse consequences. People may begin hoarding goods such as food. There can be [food supply shortages](https://www.investopedia.com/what-is-food-insecurity-8399154) as a result.

Money loses value with excessive price rises due to reduced purchasing power. Less purchasing power means consumers spend more to buy less. They have less money to pay bills and fewer dollars to use on essential items as a result.

People might not deposit money in [banks](https://www.investopedia.com/terms/f/financialinstitution.asp), leading lenders to go bankrupt. Tax revenues can fall if consumers and businesses can't pay, resulting in governments failing to provide essential services.  

## Preparing Financially for Hyperinflation: Strategies for Stability

Hyperinflation is rare, especially in developed countries with central banks controlling inflation. You can take some actions, however, to reduce the effects that normal or high inflation has on your portfolio.

A balanced and diversified portfolio can help minimize losses during inflation. Commodities and real estate often increase in value during inflation, mitigating its effects. Treasury Inflation-Protected Securities (TIPS) can hedge against rising inflation because the principal you've invested in a TIPS adjusts with inflation.

Inflation swap mutual funds and ETFs can help protect your portfolio from inflation.  

## Historical Hyperinflation Examples From Around the World

### Yugoslavia

One of the more devastating and prolonged episodes of hyperinflation occurred in former Yugoslavia in the 1990s. The country had already been experiencing inflation at rates that exceeded 76% annually and was on the verge of national dissolution.

It was discovered in 1991 that Slobodan Milosevic, the leader of the then-Serbian province, had plundered the national treasury by having the Serbian central bank issue $1.4 billion of loans to his cronies.

The theft forced the government's central bank to print excessive amounts of money to take care of its financial obligations. Hyperinflation quickly enveloped the economy as a result, erasing what was left of the country’s wealth and forcing its people into [bartering](https://www.investopedia.com/terms/b/barter.asp) for goods. The inflation rate nearly doubled each day until it reached an unfathomable rate of 313,000,000% per month.

Government control over production and wages led to food shortages, causing incomes to drop by more than 50%, and slowing production to a halt. The government eventually replaced its currency with the German mark and this helped to stabilize the economy.

### Hungary

Hungary experienced hyperinflation after World War II. Prices were rising 207% per day at the peak of Hungary's inflation.

### Zimbabwe

Zimbabwe entered a period of hyperinflation in March 2007 that equaled a daily rate of inflation of 98% until early 2009. The country's hyperinflationary period began in 1999 after it experienced several periods of drought and a following reduction in GDP.

The country was forced to borrow more than it produced as a result and the government began spending more. It increased taxes to pay bonuses to independence war veterans, became involved in a war in the Congo, and borrowed from the International Monetary Fund to improve development and living standards for citizens.

The government began printing money to pay for these expenses, causing an inflationary rise. Residents began moving to other countries to escape the economy. Millions of people had left the country by 2010 and the economy was in shambles.

## What Will Happen If Hyperinflation Occurs?

Hyperinflation doesn't occur without any indication. The Federal Reserve will implement any monetary policy tools allowed to ensure that it doesn't happen if economists in the U.S. see signs on the horizon. This happens long before inflation can reach the 50% rate.

Federal Reserve chair Paul Volcker raised rates to more than 21% to combat a rate of more than 14% in the past, leading to two recessions before inflation came under control.

## Will the U.S. Go Into Hyperinflation?

It's doubtful that the U.S. will experience hyperinflation unless economic circumstances become very dire. The Federal Reserve and the government have many tools at their disposal that can prevent hyperinflation from occurring.

## What Was the Worst Hyperinflation in History?

Hungary experienced hyperinflation from August 1945 to Jul 1946 with a daily inflation rate of 207%.

## The Bottom Line

Hyperinflation occurs when a country's inflation rate exceeds 50% per month, which can severely destabilize an economy. This phenomenon heightens consumer prices, reduces money's purchasing power, and can lead to significant economic challenges such as difficulty in meeting national financial obligations and producing goods. While hyperinflation is rare, especially in developed countries, it often results from factors like excessive money supply and demand-pull dynamics triggered by mismanagement or external pressures. Preparing with a diversified portfolio, including commodities and TIPS, can help protect your finances during increased inflationary periods.

_**Correction—July 23, 2024:** This article has been corrected to state that hyperinflation involves rapid, excessive, and out-of-control price increases that result in extreme inflation._

> **Article Sources**
>
> 1.  U.S. Bureau of Labor Statistics. "[Consumer Price Index; Data Sources](https://www.bls.gov/opub/hom/cpi/data.htm)."
>     
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>     
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>      
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