The recent monetary intervention by central banks of unprecedented form and breadth have injected significant liquidity into the financial system, saving it from collapse. However, these measures could fall short of bringing inflation back to the target level of 2%. A lot will depend on the speed and reach of the fiscal stimulus and where the liquidity ends up being invested in the real economy. More than monetary measures, fiscal stimulus can be used as a tool to prevent the kind of medium-term deflation that markets are beginning to reflect. 

Europe has not seen significant fiscal intervention since the previous financial crisis. Concerns of excessive inflation (or hyperinflation) are currently non-existent. However, the singularity of the monetary/fiscal measures and the possibility that supply chains will be relocated if the economy recovers strongly open the door to potential growth in prices.

Inflation, when controlled, can have positive effects on a country’s economy. But if it is not contained, it can degenerate into hyperinflation, wreaking serious havoc.

A quick review: inflation and deflation

Inflation is the economic process in which the average price level of a basket of selected goods increases over time.  It is generally measured as the change in the price of the same basket of goods over a specific period of time, typically one year.

The term deflation is used if the price change over a specific period of time (one year) is negative, i.e., when the purchase price of the basket of goods in year T is lower than in T-1. 

Deflation is a general decline of the price level of goods and services, usually associated with a contraction in the supply of money and credit. During deflation, the purchasing power of currency rises over time.

Healthy economies will always have small fluctuations or constant low levels of inflation and deflation. Banks and other economic factors work to reduce these fluctuations as much as possible.  The more successful the reduction, the more stable the economy.

What is hyperinflation?

Hyperinflation is used to describe stages of economic instability with very high and rapidly accelerating inflation. It is usually associated with currency depreciation. Consumers’ buying power is eroded.

Hyperinflation is an economic situation in which the value of the currency goes into a free fall.  It may be worth 1: :1 when compared to another currency one month, 50: 1 against the same currency the next and 2,000 :1 the month after that.

For instance, near the end of the American Civil War, most Confederate supporters feared the war was already lost.  The Confederate dollar, which had previously been almost on par with the U.S. dollar, suddenly dropped to a value of about 1,200: 1.

Every time there is economic, civil or governmental unrest, experts voice concerns about hyperinflation.  Stable economies do not want to trade with unstable economies, so massive upheavals mean that investors and trade partners no longer want to trade in the currency that is viewed as unstable.  It is most common during and after wars, particularly for the losing side.

There is no guideline for the duration of “official” hyperinflation. The use of the term usually hinges on the real-world effects of radical inflation, such as the sudden inability of median income earners to buy sufficient food or retain adequate housing.  It is an extreme example of inflation, which economists agree appeared about 50 times worldwide in the last century.

Too much inflation is never a good thing, but significant inflationary levels can exist without being considered hyperinflation.  For instance, if the U.S dollar suddenly moves from being worth twice as much as the Canadian dollar to being worth half as much, it is not generally considered hyperinflation. It is severe inflation and can cause significant economic instability but is unlikely to completely decimate the economy as a whole.