- Governments can fight inflation by imposing wage and price limits, but this can lead to a recession and job losses.
- Governments can also use a contractionary monetary policy to combat inflation by limiting the money supply in an economy by raising interest rates and lowering bond prices.
- Another measure used by governments to limit inflation is reserve requirements, which are the amounts of money banks are legally required to have on hand to cover withdrawals.
What can be done about inflation?
Monetary policy: monetary policy involves the central bank raising interest rates, which discourages investment and slows economic growth. Inflation is now reversed. 2. Money supply: When the central bank removes money from the market, it affects consumption and demand, lowering inflation.
Is it possible to reverse economic hyperinflation?
Because hyperinflation manifests as a monetary consequence, hyperinflation models focus on the need for money. If the (monetary) inflating does not cease, economists predict a rapid growth in the money supply as well as an increase in the velocity of money. Inflation and hyperinflation are caused by either one or both of these factors. The “crisis of confidence” explanation of hyperinflation is based on a rapid increase in the velocity of money as the cause of hyperinflation, where the risk premium that sellers demand for paper currency above the nominal value develops rapidly. The second idea, known as the “monetary model” of hyperinflation, states that there is initially a massive increase in the amount of circulating medium. The second consequence follows from the first in either modeleither too little confidence forces an increase in the money supply, or too much money destroys confidence.
In the confidence model, an incident or set of events, such as combat defeats or a run on the stocks of the specie that backs a currency, causes people to lose faith in the authority producing the money, whether it’s a bank or a government. People prefer to spend their money rather than keep notes that may become worthless. Realizing that the currency is at increasing danger, sellers want a bigger and higher premium over the original value. In this concept, the only way to stop hyperinflation is to replace the currency’s backing, which usually means creating an entirely new one. One common source of confidence crises is war, particularly losing in a war, as happened during Napoleonic Vienna, and another is capital flight, sometimes due to “contagion.” According to this viewpoint, the government’s attempt to buy time by increasing the circulating medium is a result of the government’s failure to address the core cause of the lack of confidence.
Hyperinflation is a positive feedback cycle of rapid monetary expansion in the monetary model. It has the same root cause as all other forms of inflation: money-issuing authorities, whether central or not, generate currency to cover rising costs, which are often the result of slack fiscal policy or the rising costs of war. When businesspeople believe the issuer is dedicated to a rapid currency expansion policy, they mark up prices to account for the currency’s predicted depreciation. To cover these prices, the issuer must expand quicker, causing the currency’s value to fall even faster than before. The issuer cannot “win” under this arrangement, and the only option is to stop expanding the currency immediately. Unfortunately, since expectations are suddenly modified, the cessation of expansion can give a major financial shock to individuals who utilize the currency. The Washington consensus of the 1990s included this approach, as well as cuts in pensions, salaries, and government spending.
Hyperinflation affects both the supply and velocity of money, regardless of the cause. It’s debatable which comes first, and there may be no uniform story that applies to all situations. However, once hyperinflation has been established, the practice of raising the money stock by whatever agencies are permitted to do so becomes universal. Because this method increases the supply of currency without correspondingly increasing demand, the currency’s price, or exchange rate, automatically declines in relation to other currencies. When the increase in money supply changes narrow areas of pricing power into a widespread frenzy of spending before money becomes worthless, inflation becomes hyperinflation. The currency’s purchasing value depreciates so quickly that even retaining it for a day is an unacceptable loss of purchasing power. As a result, no one retains currency, increasing money velocity and exacerbating the situation.
People attempt to spend money on real products or services as quickly as possible because rapidly rising prices weaken the role of money as a store of value. As a result of an excessive rise in the money supply, the monetary model predicts that the velocity of money will increase. Hyperinflation is out of control when money velocity and prices rapidly accelerate in a vicious circle, because traditional policy mechanisms, such as raising reserve requirements, raising interest rates, or cutting government spending, are ineffective and are met with a shift away from rapidly devalued money and toward other means of exchange.
Bank runs, 24-hour loans, moving to rival currencies, and the return to the usage of gold or silver, or even barter, are all prevalent during periods of hyperinflation. Many of today’s gold hoarders anticipate hyperinflation and are hedging their bets by hoarding specie. There could also be a lot of capital flight, or a flight to a “hard” currency like the US dollar. This is occasionally countered by capital controls, a concept that has swung from standard to anathema to semi-acceptability. All of this points to an economy that is running in a “abnormal” manner, which could result in a drop in actual output. If this is the case, hyperinflation will be exacerbated since the amount of products available in the “too much money chasing too few things” formulation will be lowered. This is also an element of the hyperinflationary vicious circle.
When hyperinflation becomes a vicious spiral, drastic policy measures are nearly always required. Raising interest rates alone will not suffice. Bolivia, for example, had hyperinflation in 1985, when prices jumped by 120% in less than a year. The government hiked the price of gasoline, which it had been selling at a great loss to quell public outrage, and hyperinflation was brought to a halt almost quickly, as it was able to bring in hard currency by selling its oil abroad. People restored their deposits to banks as the confidence crisis subsided. The German hyperinflation (1919November 1923) was ended by creating the Rentenmark, a currency based on assets lent against by banks. When one side in a civil war wins, hyperinflation usually comes to an end.
Although wage and price controls have been used to control or prevent inflation in the past, no episode of hyperinflation has been ended solely through the use of price controls, because price controls that force merchants to sell at prices far below their restocking costs result in shortages, which cause prices to rise even more.
Milton Friedman, a Nobel Laureate, stated “We economists may not know much, but we do know how to make a scarcity. Simply establish a legislation prohibiting stores from selling tomatoes for more than two cents per pound to create a tomato shortage. You’ll have a tomato scarcity in no time. The same is true for oil and gas.”
What steps does the Fed take to combat inflation?
To combat inflation, the Fed intends to begin by hiking the Fed funds rate, which has been around zero since March 2020. It will most likely begin in March. It’s unclear how high and how fast that rate will rise.
During the financial crisis of 2008, the Fed cut rates to the “zero bound” for the first time. When Ben S. Bernanke was chairman, it was part of a grand experiment, an attempt to save the shattered financial system and the sinking economy.
How can inflation be reduced?
Divide a monetary time series by a price index, such as the Consumer Price Index, to correct for inflation, or “deflation” (CPI).
Is deflation ever experienced?
Deflation is defined as a drop in the overall cost of goods and services in an economy. While a little price fall may encourage consumer spending, widespread deflation can discourage expenditure, leading to even more deflation and economic downturns.
Fortunately, deflation is rare, and when it does, governments and central banks have instruments to mitigate its effects.
What was Germany’s solution to hyperinflation?
On November 15, 1923, important efforts were made to put an end to the Weimar Republic’s nightmare of hyperinflation: the Reichsbank, Germany’s central bank, stopped monetizing government debt, and a new medium of exchange, the Rentenmark, was introduced alongside the Papermark (in German: Papiermark). Although these efforts were successful in curbing hyperinflation, the Papermark’s purchasing power was entirely damaged. To see how and why this could happen, consider the period leading up to the commencement of World War I.
The mark had been the official currency of the Deutsches Reich since 1871. The gold redeemability of the Reichsmark was suspended on August 4, 1914, when World War I broke out. The gold-backed Reichsmark (or “Goldmark” as it was known until 1914) was replaced by the unbacked Papermark. Initially, the Reich funded its war expenditures in part by issuing debt. The total state debt increased from 5.2 billion Papermark in 1914 to 105.3 billion Papermark in 1918. 1 In 1914, there were 5.9 billion Papermarks in circulation; by 1918, there were 32.9 billion. Between August 1914 and November 1918, wholesale prices in the Reich rose by 115 percent, and the Papermark’s purchasing power fell by more than half. During the same time span, the Papermark’s exchange rate versus the US dollar fell by 84 percent.
The fledgling Weimar Republic was confronted with enormous economic and political difficulties. Industrial production was 61 percent lower in 1920 than it had been in 1913, and it was even lower in 1923, at 54 percent. The Reich’s productive capability had been severely harmed by land losses following the Versailles Treaty: the Reich had lost roughly 13% of its former land mass, and roughly 10% of the German population was now living beyond its borders. In addition, Germany was required to pay reparations. The new and budding democratic governments, on the other hand, aspired to cater as much as possible to the wishes of their constituents. Because tax revenues were insufficient to fund these expenditures, the Reichsbank began printing.
From April 1920 to March 1921, the tax-to-spending ratio was just 37%. Following that, the situation improved slightly, and in June 1922, taxes as a percentage of total spending reached 75%. Then the situation deteriorated. Germany was accused of not delivering restitution payments on time toward the end of 1922. French and Belgian forces invaded and occupied the Ruhrgebiet, the Reich’s industrial heartland, in early January 1923 to bolster their claim. The German government, commanded by chancellor Wilhelm Kuno, urged Ruhrgebiet employees to defy the invaders’ instructions, saying that the Reich would continue to pay their wages. To keep the government liquid for making up revenue shortfalls and paying wages, social transfers, and subsidies, the Reichsbank began generating new money via monetizing debt.
The quantity of Papermark began to spiral out of control in May 1923. It increased from 8.610 billion in May to 17.340 billion in April, 669.703 billion in August, and 400 quintillion (400 x 1018) in November 1923. 2 From the end of 1919 to November 1923, wholesale prices soared to astronomical heights, increasing by 1.813 percent. You could have bought 500 billion eggs for the same money you would have spent five years later for only one egg at the end of World War I in 1918. The price of the US dollar in Papermark had risen by 8.912 percent from November 1923 to November 1924. The Papermark has depreciated to the point of being worthless.
Unemployment was on the rise as a result of the currency depreciation. Since the war’s end, unemployment has stayed relatively low, despite the fact that the Weimar governments kept the economy afloat with aggressive deficit spending and money printing. The unemployment rate was 2.9 percent at the end of 1919, 4.1 percent in 1920, 1.6 percent in 1921, and 2.8 percent in 1922. However, after the Papermark’s demise, the jobless rate has risen to 19.1% in October, 23.4 percent in November, and 28.2% in December. The vast majority of the German populace, particularly the middle class, had been devastated by hyperinflation. People were affected by food shortages and the cold. Extremism in politics was on the rise.
The Reichsbank was the fundamental problem in resolving the monetary dilemma. The Reichsbank’s president, Rudolf E. A. Havenstein, had a life term and was virtually unstoppable: under Havenstein, the Reichsbank continued to issue ever bigger sums of Papiermark to keep the Reich afloat financially. The Reichsbank was thus ordered to halt monetizing government debt and issue new money on November 15, 1923. At the same time, it was decided to make one Rentenmark equivalent to one trillion Papermark (a value with twelve zeros: 1,000,000,000,000). Havenstein died unexpectedly of a heart attack on November 20, 1923. On the same day, Hjalmar Schacht, who would become Reichsbank president in December, took measures to stabilize the Papermark versus the US dollar: the Reichsbank made 4.2 trillion Papermark equal to one US Dollar by foreign exchange market interventions. The exchange rate was 4.2 Rentenmark for one US dollar, because one trillion Papermark was equal to one Rentenmark. Before World War I, this was the exact rate of exchange between the Reichsmark and the US dollar. The “Rentenmark Miracle” signaled the end of hyperinflation. 3
How could such a monetary crisis occur in a civilized and advanced society, resulting in the currency’s total destruction? There have been numerous reasons offered. It has been claimed that reparations payments, persistent balance of payment deficits, and even the depreciation of the German currency in foreign exchange markets were all factors in the currency’s collapse. These justifications, however, do not hold water, as German economist Hans F. Sennholz explains: “Every mark was printed by Germans and issued by a central bank managed by Germans under a wholly German administration.” The policies were primarily the responsibility of German political parties such as the Socialists, the Catholic Centre Party, and the Democrats, which formed successive coalition governments. Of course, no political party can be expected to accept responsibility for any disaster.” 4 Indeed, the German hyperinflation was caused by a deliberate political decision to expand the amount of money in circulation de facto without limit.
What can we learn from Germany’s hyperinflationary experience? The first lesson is that even a politically independent central bank cannot guarantee that (paper) money will not be destroyed. The Reichsbank had been given political independence as early as 1922, ostensibly on behalf of the allied forces in exchange for a temporary suspension of reparation payments. Despite this, the Reichsbank chose to hyperinflate the currency. The Reichsbank’s council decided to provide infinite quantities of money in such a “existential political crisis” since the Reich was increasingly reliant on Reichsbank credit to stay solvent. Of fact, the Weimar politicians’ credit hunger proved to be limitless.
The second point to remember is that fiat paper money is useless. “The introduction of the banknote of state paper money was only conceivable because the state or the central bank committed to redeem the paper money note at any moment in gold,” Hjalmar Schacht wrote in his 1953 biography. All issuers of paper money must make every effort to ensure that gold can be redeemed at any moment.” 5 In Schacht’s words, there is a key economic insight: Unbacked paper money is political money, and as such, it can cause havoc in a free market society. This was long ago pointed out by representatives of the Austrian School of Economics.
Paper money is not only continuously inflationary, but it also promotes malinvestment, “boom-and-bust” cycles, and over-indebtedness since it is created “ex nihilo” and injected into the economy through bank lending. When governments and banks, in particular, begin to struggle under their debt loads, and the economy is on the verge of contracting, printing more money appears all too easily to be a policy of choosing the lesser evil in order to avoid the problems that credit-produced paper money caused in the first place. Looking at the globe today, when many economies have been utilizing credit-produced paper currencies for decades and debt loads are astronomically high, the current issues are strikingly comparable to those faced by the Weimar Republic more than 90 years ago. A monetary order reform is urgently needed now, as it was then, and the sooner the task of monetary reform is accepted, the lower the adjustment costs will be.
- 1. Take a look at what’s here and what’s next. H. James, “Die Reichbank 1876 bis 1945,” in Deutsche Bundesbank, ed., Fnfzig Jahre Deutsche Mark, Notenbank und Whrung in Deutschland seit 1948 (Mnchen: Verlag C. H. Beck, 1998), pp. 2989, esp. pp. 4654; C. Bresciani-Turroni, The Economics of Inflation, A Study of Currency Depreciation in Post-War Germany (Northampton: John Dicken (New York: Russell & Russell, 1967 ).
- 2. To be certain: 400,000,000,000,000,000,000 is a “400” with 18 zeros. It is referred to as a “quintillion” in American and French nomenclature, whereas it is referred to as a “trillion” in English and German nomenclature. The American nomenclature will be utilized throughout this text.
- 3. See Bresciani-Turroni, Economics of Inflation, chap. IX, pp. 334358 for further information.
- 4. H.S. Sennholz, Age of Inflation, Western Islands, Belmont, Mass., 1979, p. 80.
- Kindler and Schiermeyer Verlag, Bad Wrishofen, 1953, pp. 207-208. 5. H. Schacht, 76 Jahre meines Lebens (Kindler und Schiermeyer Verlag, Bad Wrishofen, 1953), pp. 207-208. This is my interpretation.
Will the United States experience hyperinflation?
Inflation has returned. Despite the fact that rates are likely to fall in 2022, Martin Paick and Juraj Falath note that there is a lot of uncertainty, and the Fed needs to act now to prevent having to reverse course later.
Despite the fact that some price rises were anticipated, US inflation rates have routinely exceeded economists’ estimates. Seven of the last ten CPI inflation numbers shocked economists to the upside, but none to the downside. New COVID mutations that are more transmissible, slower vaccine rollouts (creating supply bottlenecks in emerging nations), decreased vaccine efficacy, supply chain disruptions, climatic hazards, and rising property and energy prices are all potential risks.
Inflationary pressures that persist are unfavorable for debtors. A little degree of inflation above target could help countries restructure their debt and wipe out some of the record government debt burden. If inflation spirals out of control and central banks are forced to slam on the brakes by hiking interest rates sharply, those record debt levels would hurt even more. Furthermore, stifling economic activity too severely risks triggering a new recession.
Inflation soared because of COVID
To determine if we should be concerned about inflation, we must first examine the current sources of inflationary pressures. The only source of inflation that should prompt a contractionary macroeconomic policy response (either monetary by raising interest rates or fiscal by reducing budget deficits) is inflation caused by the labor market. There is a risk of “overheating” when workers have enough bargaining strength to win a pay raise that exceeds the economy’s long-term potential. Only in this case, where wage growth exceeds productivity growth, should macroeconomic policy be intervened. Other supply-side causes of inflation, such as commodity prices, are very volatile and largely determined by global markets. These inflationary pressures are unlikely to be permanent because they are not the product of overheating.
Energy costs and variables related with the reopening of the US economy were the key drivers of inflation at the start of 2021. Both of these things are usually just transient. However, since the second quarter of 2021, CPI inflation has been increasingly driven by increases in the pricing of core items that are unrelated to the reopening (Figure 1, green columns). This could point to the fact that inflation is becoming more persistent.
Figure 1 shows the impact of reopening and other factors on CPI inflation in the United States (month-on-month in per cent)
Source: Bloomberg, based on my own calculations. Food away from home, used automobiles and trucks, car and truck rental, housing away from home, motor vehicle insurance, and airline cost are all included in the CPI’s reopening component. The rest of the COICOP categories are included in the non-reopening component.
The globe is currently experiencing the worst energy crisis in decades. Gas and power rates have reached all-time highs. This can be considered as part of a compensation for the extreme price drops in 2020, which drove several factories to shut down. The removal of limits increased commodity demand, resulting in higher energy costs. Emission allowances have become more expensive, resulting in a type of green tax. The need for natural gas and oil is increasing as winter approaches. Because supplies are limited, the severity of the crisis will be determined by how cold it becomes.
What we call to as reopening factors have been the second major contributor to headline inflation. Demand has rebounded in contact-sensitive sectors such as vehicle sales, transportation, recreation and culture, holidays, and restaurants as social alienation has reduced. As a result of the battle to supply this pent-up demand and process stockpiled orders, prices began to rise. Reopening triggered inflationary pressures on both the supply and demand sides. Production bottlenecks were caused by a paucity of crucial components in the automobile sector, as well as expensive energy. When demand for cars was low, some chipmakers redirected deliveries to mobile operators. The scarcity of chips available to carmakers pushed vehicle costs up as it started to recover.
Labour markets are much tighter than employment data suggests
We need to look at labor market developments to assess the inflation picture. In general, the unemployment rate decreases as the economy recovers. Workers get more bargaining power as labor demand rises, allowing them to negotiate higher compensation. Their achievement will have an impact on inflation, as higher labor expenses may be passed on to consumers in the form of higher product prices. This can result in a downward price-wage spiral.
More persons chose to remain in retirement, either to health issues or a re-evaluation of life goals.
The labor market in the United States is much tighter than it appears, despite the fact that there are 4.7 million fewer employed employees than before the pandemic. With unemployment at 4.2 percent, there is still a long way to go before reaching the pre-pandemic low of 3.5 percent. The majority of the tightness stems from a drop in participation. Some people were able to retire early or take a temporary hiatus from work because to generous fiscal handouts such as childcare benefits or direct checks to American families. However, a large portion of the reduction in participation was attributable to fewer previously retired people returning to work. More of those people choose to remain in retirement, owing to health issues or a re-evaluation of their life goals. Jobs are plentiful, with 10.4 million opportunities in September. When combined with the historically high percentage of Americans quitting their employment voluntarily, this indicates high job market confidence and, as a result, tight labor markets. Wage inflation is likely to persist as businesses compete for workers who have a choice of occupations.
In the long run, the highest rate of wage increase that can be sustained is equal to the central bank’s inflation target (2% in the US) plus possible productivity growth. Given that this rate in the United States is projected to be about 1.5 percent, nominal wages can rise by about 3.5 percent year over year without worrying about inflation exceeding the objective. In October, average hourly earnings in the United States increased by 4.9 percent year over year, indicating that workers are increasingly able to demand better pay. This is different from the past, when wages did not begin to rise until the recovery was nearing its end. Even more strangely, low-wage workers have benefited the most from the recovery. While this is wonderful news, it could also mean slightly higher inflation in the long run because low-wage employees spend disproportionately on essential commodities.
Markets still on team transitory with more upside risks
Prices are influenced by what consumers and businesses expect, as well as the current situation of the economy. People will demand greater wages in the negotiation process if they predict more inflation. Firms may then try to pass the cost on to customers in the form of higher prices. This is less of an issue for them during times of high demand.
Inflation is expected to rise in the short future, according to financial markets. Long-term expectations in the United States are beginning to de-anchor, with 5y5y forward swaps topping 2.5 percent (Figure 2). The de-anchoring of expectations could have serious effects if they remain high or rise much higher.
Median inflation estimates can be of limited help when the severity of the problem and the desired policy response are dependent on inflation drivers and tail risks. A closer examination of expectations reveals that there is still a modest (but not insignificant) probability that average inflation will exceed 4% during the next five years (Figure 3, red area). The markets, on the other hand, continue to assume that inflation of 2.5-4 percent on average over the next five years is the most likely scenario (Figure 3, dark yellow area). This could lead the Fed to slam on the brakes in the future in order to keep inflation under control. The flattening of the yield curve further supports the idea that the Fed committed a policy blunder by adopting such a lax policy. Although markets anticipate some interest rate hikes in the near future, a rate reversal signals that the transition to neutral rates will be bumpy.
Figure 3: Future inflation probabilities determined from inflation alternatives (average expected inflation for the next 5 years)
The Fed is on the brink of a policy mistake
The inflation rise is consistent with most economic theories, given the unique character of the crisis and the fact that inflationary pressures are mostly originating from the supply side. The key question currently facing central banks is whether increased inflation will become permanent. If employees continue to earn larger wages, this could happen. The de-anchoring of inflation expectations from the central bank aim is another reason why inflation could become entrenched. According to popular belief, if inflation is driven by temporary circumstances, it cannot endure for a long time. These two mechanisms, on the other hand, call this premise into question. Neither may be easily remedied, and each may necessitate a policy shift by central banks. Right now, the greatest danger is not hyperinflation, but long-term high inflation.
Huge quantities of fiscal stimulus, particularly in the form of generous unemployment benefits and checks to low- and middle-income families, have sown the seeds of inflation. Savings have been boosted even more by historic returns in resurgent stock markets, which have benefited Americans in particular. In the near future, this, together with pent-up demand, is anticipated to exert upward pressure on pricing.
Should we thus dismiss Joe Biden’s Build Back Better plan as adding more fuel to the inflation fire? Certainly not. For the first time, a significant portion of the bill is aimed at increasing labor market participation by providing childcare for working families. One of the major concerns about current inflation might be resolved by making it simpler for people to return to work, thereby alleviating labor shortages.
The true danger of escalating inflation outweighs the fact that the US is still not at full employment.
The central bank’s alternatives are restricted. To speed up deliveries, the Fed can’t produce missing semiconductors, mine more oil, or build faster ships. It’s possible that reducing pent-up demand is the way to proceed. However, because the US is still far from full employment, the Fed’s self-imposed benchmark for reducing stimulus, the dual mission complicates things. Furthermore, following the most recent strategy review, full employment should be inclusive as well. This criterion will not be met anytime soon, as Hispanic and Black minorities have been disproportionately affected by the COVID recession.
The real risk of inflation becoming entrenched, in our opinion, outweighs the fact that the United States is still far from full employment. This is a once-in-a-lifetime chance for fiscal and monetary policy to come together. While the monetary side may stop pumping cash into the system, so dampening demand, the fiscal side could much more effectively encourage workforce participation, assisting the Fed in meeting its full employment aim.
In the end, the credibility of the Fed will be critical. Open dialogue and self-reflection are the first steps. The Fed should be candid about why it miscalculated inflation persistence and adjust its assessment of future risks. The recent decision to accelerate the withdrawal of stimulus is a significant step toward recovering credibility and trust in the Fed’s ability to control inflation. The Fed has removed the word “transitory” from its vocabulary, admitting inflation as the number one enemy and signaling speedier rate hikes as an early sign of self-reflection. However, it should do more now in order to avoid having to slam on the brakes later.
Has the United States ever experienced hyperinflation?
The trend of inflation in the rest of the world has been quite diverse, as seen in Figure 2, which illustrates inflation rates over the last several decades. Inflation rates were relatively high in many industrialized countries, not only the United States, in the 1970s. In 1975, for example, Japan’s inflation rate was over 8%, while the United Kingdom’s inflation rate was around 25%. Inflation rates in the United States and Europe fell in the 1980s and have mainly been stable since then.
In the 1970s, countries with tightly controlled economies, such as the Soviet Union and China, had historically low measured inflation rates because price increases were prohibited by law, except in circumstances where the government regarded a price increase to be due to quality improvements. These countries, on the other hand, were plagued by constant shortages of products, as prohibiting price increases works as a price limit, resulting in a situation in which demand much outnumbers supply. Although the statistics for these economies should be viewed as slightly shakier, Russia and China suffered outbursts of inflation as they transitioned toward more market-oriented economies. For much of the 1980s and early 1990s, China’s inflation rate was around 10% per year, however it has since declined. In the early 1990s, Russia suffered hyperinflationa period of extremely high inflationover 2,500 percent a year, yet by 2006, Russia’s consumer price inflation had dropped to 10% per year, as seen in Figure 3. The only time the United States came close to hyperinflation was in the Confederate states during the Civil War, from 1860 to 1865.
During the 1980s and early 1990s, many Latin American countries experienced rampant hyperinflation, with annual inflation rates typically exceeding 100%. In 1990, for example, inflation in both Brazil and Argentina surpassed 2000 percent. In the 1990s, several African countries had exceptionally high inflation rates, sometimes bordering on hyperinflation. In 1995, Nigeria, Africa’s most populous country, experienced a 75 percent inflation rate.
In most countries, the problem of inflation appeared to have subsided in the early 2000s, at least when compared to the worst periods of prior decades. As we mentioned in an earlier Bring it Home feature, the world’s worst example of hyperinflation in recent years was in Zimbabwe, where the government was issuing bills with a face value of $100 trillion (in Zimbabwean dollars) at one pointthat is, the bills had $100,000,000,000,000 written on the front but were nearly worthless. In many nations, double-digit, triple-digit, and even quadruple-digit inflation are still fresh in people’s minds.
What is creating 2021 inflation?
As fractured supply chains combined with increased consumer demand for secondhand vehicles and construction materials, 2021 saw the fastest annual price rise since the early 1980s.