Hyperinflation - Definitions

Definitions

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 a hyperinflationary episode as starting in the month that the monthly inflation rate exceeds 50%, and it ending when the monthly inflation rate drops below 50% and stays that way for at least a year. Economists usually follow Cagan’s description that hyperinflation occurs when the monthly inflation rate exceeds 50%.

The International Accounting Standards Board does not establish an absolute rate at which hyperinflation is deemed to arise. Instead, it lists factors that indicate the existence of hyperinflation:

• 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
• 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 currency;
• Sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power during the credit period, even if the period is short;
• Interest rates, wages, and prices are linked to a price index; and
• The cumulative inflation rate over three years approaches, or exceeds, 100%.