Hyperinflation: is it likely in 2021 – 2022?

This article will discuss whether hyperinflation is likely in the UK, US and beyond.

Could a currency crisis result in high-inflation in either country?

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Inflation:

Inflation is the financial situation where the purchasing power of a specific unit of currency is decreased while leading to an increase in the price of goods and services. 

In simple terms, it is a devastating financial situation where each and every person has is burdened with an increase in prices of everything they buy or every service they acquire. 

For example, when inflation occurs, a person has to pay more for filling gas at a gas station, buying household items, or even to getting a haircut. The total cost of living of a person would be altered because of inflation.

Consider the inflation in the US as an ample example. The inflation that occurred in the US has resulted in the reduction of the dollar’s price. Compare the value of a dollar today with its value in the past. 

As the inflation increase, the value of money decreases and you can only buy very little with your money. Based on this, the standard of living of a particular person is reduced over time.

Inflation Rate – The inflation rate is the percentage change over a certain period of time, which can either increase or decrease. This percentage is helpful in providing an estimation about the price change in the following year.

For example, if a gallon of gasoline costs $2 and has inflation of 2%, then the price will have an increase of 2% next year and would be $2.4.

There are three types of situations in inflation. Let us have a detailed look at each of these three types of inflation.

  1. When inflation occurs within assets like real estate, gold, stocks, etc., then it would be called ‘Asset Inflation’. 
  1. If inflation and recession occur during the same time, then this situation would be referred to as ‘Stagflation’.
  1. When the inflation rate is 50% or more than that, then this specific situation is called ‘Hyperinflation’.

The inflation rate acts as a crucial factor of the ‘Misery Index’, which is an economic indicator used to estimate the financial health of an average citizen. Another major factor of the Misery Index is the unemployment rate. 

When the misery index is more than 10%, then the financial situation of the people suggests that they are either suffering from a recession, or a hike in inflation, or sometimes even both. 

Causes of Inflation – There are two major causes that lead to inflation, which are ‘Demand-Pull Inflation’ and ‘Cost-Push Inflation’. 

Demand-Pull Inflation is the most common cause, where the demand for goods and services overcomes the supply. 

In this case, the people are very interested in acquiring the specific goods or services that they actually become willing to pay higher prices.

Cost-Push Inflation is often a rare cause, where the supply of goods and services is restricted although the demand stays normal. 

An example of this is Hurricane Katrina in August 2005 in the USA. As an aftermath of this category-5 hurricane, gas supply lines got damaged. Even though the demand did not increase during then, the supply channels raised the prices to $5 per gallon.

According to some people, inflation could also be an end result of an increase in the money supply. This actually is the misinterpretation of Monetarism. 

Based on this, if the government prints too much money, inflation occurs as too much money chases too few goods. Inflation is created because of triggered demand-pull inflation or cost-push inflation.

There is yet another theory, which is considered as the third cause of inflation. According to this, as time goes on, labor would expect their salaries to have an increase. This would lead to an increase in the cost of the manufacturing or production of goods and services.

When that happens, the price of goods and services will also end up having an increase. If this sort of cause and effect goes on continuing, the situation becomes a wage-price merry-go-round.

CPI (Consumer Price Index):

Inflation is measured by the U.S. Bureau of Labor Statistics (BLS) with the help of the Consumer Price Index. This index actually acquires the data on the basis of a survey of 23,000 businesses.

CPI records the data for the prices of around 80,000 consumer items on a monthly basis. There is a misconception that these two are entirely different concepts, however, it is not true. 

CPI is a tool used to measure inflation, and henceforth, it is not a different form of inflation. 

On the other hand, the Personal Consumption Expenditures price index is also used to measure the inflation rate. Additionally, it includes more goods as well as services when compared to CPI.

To state a general difference between these two, PCEPI includes the healthcare services, which are usually paid by the health insurance companies. CPI includes medical bills that are paid by the individuals. 

Hyperinflation:

Hyperinflation, as discussed earlier, is a term used to depict a situation where the inflation rate of 50% or higher than that. 

In simple words, the prices of goods and services experience a rapid as well as excessive hike, while the prices increase in such a way that they get out of control.

Hyperinflation is a situation that is often rarely seen in the cases of well-developed countries. However, some of the developed countries such as Russia, China, Germany, Hungary, etc., have experienced it.

In general, Hyperinflation occurs in times of certain events such as war. If not war, then it would be a situation where there is economic turmoil in the underlying production economy with respect to a central bank printing out an excessive amount of money.

Hyperinflation leads to an escalation in the prices of even basic goods such as food, fuel, etc., as a result of these goods becoming scarce.

Even though hyperinflation can be seen rarely, once it happens, it can go way out of control very quickly.

Causes of Hyperinflation – The two major causes of hyperinflation are demand-pull inflation and an increase in the money supply. 

Usually, the government prints out more money as a measure for taking care of its expenditures. Due to this, the supply of money increases and result in inflation.

Contrarily, the other cause of demand-pull inflation. We have already discussed demand-pull inflation, and this caused by three reasons:

  • Increase in the expenditure of a consumer as a result of a growing economy.
  • Sudden surge in exports.
  • Excessive government spending.

Basically, the demand-pull inflation and the increase in money supply often go together. Governments might increase the money supply as a measure for stopping inflation.

Because there would be too much money lying around, prices of goods and services experience rapid growth. Before anyone could know what is happening, they would expect continuous inflation. 

When such a situation occurs, people panic and buy more goods and services in advance to avoid paying more prices for them later. This leads to a demand for goods and results in inflation. 

Stockpiling goods and leading to a shortage in the goods might make the situation even worse.

This stockpiling of goods starts with consumer durables that are purchased frequently including goods such as household appliances, automobiles, etc. 

If this situation keeps on continuing, there would be a scarcity of perishable goods such as food, milk, etc. Finally, there would be a scarcity of daily supplies and the economy starts falling apart.

Senior citizens would become most vulnerable to this as their savings in cash become worthless. Soon, banks and other financial lending institutions would go bankrupt and the loans lose the value. People stop depositing money resulting in depletion of cash in the banks.

When hyperinflation occurs in a country, the value of that particular country’s currency would plummet and lose its value in the international forex markets. 

Imports businesses would go bankrupt due to the heavy surge in the prices of foreign goods.  As a result of companies going bankrupt, the unemployment rate starts to escalate.

The tax revenue of the government falls, and it becomes difficult for the government to provide basic services. In such a situation, if the government starts to print some more money, everything will become disastrous.

Two types of people can benefit from such hyperinflation situations. First are the people who might have acquired a loan. They find that the higher prices end up making the debts worthless until they are completely wiped out.

Along with them, exporters might also be able to benefit from this situation. Export businesses tend to gain more popularity as they become cheaper compared to their foreign rival companies.

Additionally, they receive foreign currency, which is greater when compared to their local currency as it took a hit. 

Will there be hyperinflation in 2021 or 2022?

The situation in the UK – This a question that is arising among most people nowadays. Well, according to some valid theories and factors, we think that the chances of having hyperinflation in 2021 – 2022 are quite low.

Take a look below to get an idea about why we think that there won’t be hyperinflation in 2021 – 2022. 

There are many people that worry about the chances of having inflation. Such people often try to spread the news (similar to a wildfire) that the chances are highly likely to see hyperinflation in 2021.

They support their belief by showing the overheated scenario due to the Coronavirus and Brexit situation. Of course, this is considered an overheated situation. 

However, it does not mean that it is true because the economy is said to be on track for many countries. Especially when it comes to the UK, the economy has taken a fall of less than 10% by the end of 2020 in contrast to the beginning.

According to the Treasury’s official forecaster, which is the Office for Budget Responsibility (OBR), states that it would take at least until the end of 2022 in order to catch up with the previous peaks of the economy.

It is expected that there would be a rise of 5.5% in 2021 and 6.6% in 2022 based on the predictions of OBR. This led OBR to create a benchmark for making all the treasury-related decisions in these two years.

However, this annual growth might seem impossible to some people because there was only a 1% – 2% economic growth observed over the last decade. But this is just an assumption when it comes to reaching a specific position. 

Some analysts notice the current situation with an entirely different approach. These analysts are extremely positive about the recent vaccination programs. They anticipate that the economies will get back on track by the summer of 2021.

In order to make fast pace recovery happen, the industries should be able to balance the created extra demand with the help of an extra supply. 

Inflation Hawks’ theory – In the UK, the Brexit situation has been having an impact on the manufacturers and producers for quite some time. Now, add COVID-19 into the equation. 

In most industries that try to gain profits from the ‘jump back in’ activity, unessential workers would be removed. 

As per the inflation hawks (who say there will be hyperinflation), this means that there would be a new situation that would be leading to an escalation in the demand for the goods and services that would result in companies selling scarce goods at higher prices.

Then the central bank would bring over their £1 trillion worth of assessable easing programs (with funds from the Bank of England worth £875 billion), will try to counter the inflation.

Funds that still need to be lent in the corporate sector along with billions of pounds (central bank funds) ideally sitting in the commercial banks would come out as ultra-cheap loans. 

Apart from that, the UK mortgage sector that has been sustained with the help of a stamp duty cut is also questionable. This stamp duty cut implemented by Rishi Sunak won’t have chances of existing after April 2019.

In case it happens, this stamp duty will come out as an additional burden on the consumers without the help of government subsidy. 

In such conditions, consumers will start a borrowing frenzy while increasing the prices of goods and services.

Finally, inflation hawks are saying that this will lead to hyperinflation of 10% or more as a result of an overheated economy based on all the above-mentioned factors.

What experts say – David Owen, a chief European economist working at the City firm called Jeffries, stated that this situation could usually result in cut rates for banks in 2021 is likely to enter into negative territory. 

This would usually happen to cope with the Brexit situation and later the rates would increase in order to prevent overheating.

This theory has not been reached out to the public clearly as the Bank of England’s most recent reports state that the anticipated inflation can be around 3.8% by the next year.

When we take a look at the similar 2008’s financial crisis situation, there was an increase of 5% in inflation in 2011, which happened to be a shorter period.

The reason for this situation mainly appears out to be that nervous consumers were more in the economy that was dealing with the financial crisis. 

Most of these people had the same wages or even lesser wages than they used to have before 2008. Without the increase in wages, there cannot be a surge. Even if there is one, it can most probably be sustained.

According to the government, the private sectors would see growth and development first because they had a drastic downfall regarding wages. 

Public Sector workers won’t have an increase of more than 1% in their wages over the next year.

Private sectors are likely to have substantial growth due to this. However, even if that happens, it would be just as the OBR predicted for attaining a better GDP (the catching up).

Even before COVID-19, the unemployment rate was a record level low over the past 40 years, mostly the rise in wages was due to the hike in the minimum wages. 

However, employers currently have no desire nor immediate requirement to increase the wages or improve the stand of living of their workers unless they are forced to do so. 

Similar is the situation in most parts of the world and keeping that in mind, we can have a deep breath and not worry about inflation. 

In the United States – when it comes to the United States, 40 years ago, the federal reserve chairperson Paul Volcker took up some extreme measures to deal with inflation.

Back then, Volcker intentionally threw over the economy into recession by raising the interest rates. This game plan actually succeeded and was able to kick off the decline in the interest rates for multiple decades and set off inflation. 

This strategy of Volcker led to ripple effects, which is stated by the investors nowadays as the defining features of the modern-day investment landscape.

This led to a scenario where most investors would have the fear of inflation at the beginning of each year. Similar is the situation in 2021 as well. 

Bank of America Global Research conducted a Global Fund Managers’ Survey, which reports that the second major risk in 2021 is expected to be inflation, while the first being COVID–19. 

However, with the economy recovering by itself from the circumstances caused by the pandemic. 

Monetary and Fiscal authorities try to support the recovery and have a sustained rate of inflation hasn’t been possible since as long as the 1990s. Keeping that in mind, it shouldn’t be considered a big threat in 2021 as well. 

Based on the info obtained from Business Insider, apart from a few sectors, the consumer price inflation is expected to be friendly in 2021, despite the fact that the economy is recovering.

With an exception for the commodity price changes, the inflation will usually be slow. The surge in the prices for goods and services that has been called ‘sticky’ is also at a slower pace.

However, inflation pressure could be largely concentrated on the health care sector and we all know the reasons for that.

On the basis of the recession (because of lockdown) and the recovery due to the vaccine, the prices pressure in some sectors would actually be reduced faster when compared to some other sectors. 

Depending on the bullish commodity predictions, bearish dollar views, and the primary CPI predictions, economists expect a jump to 3.1% every year in the US.

If we take a look at the 5 years/5years breakdowns of expected inflation over the upcoming 5 years, there is some expected inflation among the participants of the market.

However, the aspect of how much change can be observed in inflation depends wholly on the Federal Reserve.

It is either that the pressures created would force the Fed to make monetary policy less obliging or they actually don’t. 

Based on Goldman Sachs’ report, inflation will not be affecting the central bank calculus in 2021, even though companies expect long term government bonds could see a rise as the economy recovers.

Goldman also states that G10 central banks would worry more concerning the core inflation on the basis of substantial economy-wide productivity alterations. So, they say that these higher inflation risks underpin the mildly bearish G10 duration concerns when compared to the hawkish central banks.

By considering all the factors, Fed is not expecting hyperinflation anytime soon in 2021 or 2022. However, this does not mean that there won’t be any inflation-related pressures in 2021 as the economy starts opening up and risk-prone (virus) activities will be resumed.

We think that there will be a huge demand for recreational services in the US such as hotels, airlines, casinos, theme parks, restaurants, etc. This can be dealt with because these wouldn’t account for more than 5% of the total consumption. 

Because there would be inflation in the prices of certain goods and services doesn’t necessarily mean that all the goods and services will have a surge in their prices. 

Therefore, Inflation occurring in certain aspects or areas might lead to hyperinflation in 2021 – 2022. 

Bottom Line:

If you are a person who usually worries more about hyperinflation, then you take some measures to survive hyperinflation, if it occurs.

First of all, you can get prepared by having a diverse portfolio, where you should balance your assets among international stocks, bonds, precious metals like gold, and real estate.

Keep your passport ready as it might come in handy if the situation becomes worse in your country due to hyperinflation leading to a worse standard of living.

Learn new skills and increase your talent because this would usually be helpful when you need to get used to the bartering system. This is because money loses its value during times of hyperinflation. 

That being said, we hope that you like this article and were able to find the information for which you have been searching. 

If you need someone to provide you financial planning regarding your investment requirements or need assistance for your wealth management needs, you can get access to the top-rated financial solutions offered by us. 

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Financial Planner - Adam Fayed

Adam is an internationally recognised author on financial matters, with over 214 million answers views on Quora.com and a widely sold book on Amazon.

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