You’ve probably noticed prices rising everywhere you look. Maybe you’ve heard of hyperinflation. But what exactly does it mean? And are we on track for hyperinflation like Germany had 100 years ago?
9 min read
If you’ve been to the supermarket or gas pump recently, you’ve probably noticed the increase in prices. One thing is clear: after years of stable prices, inflation is back. This makes it more difficult to set aside money, especially if you’re already on a budget. And there’s another term you may have heard in the news: "hyperinflation."You might think of words like hyperactive, hyperventilation, or something similarly negative. But what exactly does hyperinflation mean, and how does it impact society and the economy at large? And most importantly: Should we brace ourselves for a hyperinflation event like we saw in Germany around 100 years ago? Read on to learn more about hyperinflation, including how the situation in 1923 differs from today, and how you can still manage to save money. So, don’t hyperventilate just yet—take a calming breath and keep reading!
What is hyperinflation?
An increase in pricing is a clear sign of currency depreciation, which means that a currency is losing value. In extreme circumstances, this can lead to hyperinflation, when the loss of value causes prices to rise quickly. This happened in Germany in 1923, when the value of the currency—at that time, the German mark—decreased so rapidly that a loaf of bread ended up costing 5.6 billion marks. Just four weeks earlier, it cost “only” 14 million marks. Uncle Scrooge's money bin would have been depleted very quickly back then—and his stomach wouldn’t have been full for nearly half as long. Let’s see how this compares with Germany today. In April 2022, the price of bread was 12.5% higher than it was in January 2020. It used to cost €3 and now we have to pay an average of €3.38. So, the price of bread is definitely increasing, but it’s a relatively slow development. Although there is no official definition for hyperinflation, the term generally refers to a quick, excessive, and uncontrollable rise in prices within an economy, typically more than 50% per month. Hyperinflation is usually very short-lived, like a fever spike. On a graph, you would see a short increase followed by a sharp uptick and then a steep fall. But how does currency devaluation happen so quickly and uncontrollably?
Causes of hyperinflation
Hyperinflation is usually preceded by inflation. Prices may rise as a result of shortages, for example, due to increased demand. The economy is naturally subject to fluctuations—so price changes are quite normal. External factors such as crises, war, or social upheaval, however, can quickly throw things out of balance. The market is shaken by external circumstances, the economic output decreases, and unemployment rates rise. Plus, the government plays a crucial part because it can print endless amounts of money and cause inflation. Then, why would governments do this?
Governments in debt
The more money that comes into circulation, the more it loses value. Governments may print more money if they have a lot of debt. The idea behind this is simple: Just like you can get a loan to finance your further education, countries can borrow so-called government loans, for example, from the central bank or another country. A country may do this, for example, when its economic output is so poor that it can’t collect enough taxes to cover its expenses. But what happens when a heavily indebted country is unable to repay its loans? They take advantage of inflation, because government bonds are non-indexed, nominal bonds. This means that government bonds don’t lose value in times of inflation. During inflation, real prices increase and more money comes into circulation. However, the government bond’s nominal value remains unaffected. This makes it easier for the country to pay back its debts.However, this kind of monetary policy can quickly become a problem if the country keeps borrowing more money. Just like people living with financial stress, governments too can fall into the trap of taking on debt and can lose their creditworthiness. In case of inflation, creditors (i.e. other countries or banks) will increase nominal interest rates and reduce the maturities of the bonds in order to protect themselves. The already-indebted country now has to repay the debts more quickly. So, the government takes out more loans and prints more money, and this vicious cycle spirals out of control—just like it did in Germany a hundred years ago in the former Weimar Republic. But when exactly was Germany affected by hyperinflation, what caused it, and are there other examples?
Banking basics
Banking jargon can be confusing—but it doesn't have to be. Find simple explanations to popular banking terms.
Historical examples of hyperinflation: 1923 and afterwards
Although hyperinflation is a rare event, it has occurred multiple times throughout history, from Germany to Zimbabwe. Here are some real-world examples of hyperinflation:
German Weimar Republic: 1922 - 1923
What caused hyperinflation in 1923? The German Weimar Republic was deeply in debt due to enormous reparations payments following World War I. The government tried to lessen its debts by injecting more money into circulation. So, the inflation was planned—but it quickly got out of control. The central bank printed more and more money to eliminate the government's deficit and even to pay salaries. Meanwhile, banks increased their interest rates to more than 50%, meaning that loans became more and more expensive and difficult to get. The value of money plummeted until the monthly inflation rate was at 29,500% (yes, you read that right!). Unsurprisingly, food prices quickly ran into the billions, and the effects for the general population were devastating. Many people lost everything. Only currency reform and an immediate stop to printing money helped to slow down Germany’s hyperinflation.
Hungary: 1945 - 1946
Hungary faced hyperinflation after World War II. The economy was at a standstill, food was in short supply, and agriculture and infrastructure were largely destroyed. Prices kept rising and the central bank started to print more money. In June 1946, the situation escalated further. Prices multiplied almost every hour until Hungary's monthly inflation rate reached 41.9 quadrillion percent—the highest inflation in history. Again, the dramatic currency devaluation could only be stopped by currency reform.
Peru: 1990
In the 1960s and 1970s, hyperinflation seemed a thing of the past. But in the mid-to-late 1980s it returned—not only to Europe, but also to the Latin American continent. In 1989, Brazil's monthly inflation rate was 84%. Then, in 1990, Peru saw a monthly inflation rate of 397%. The country’s hyperinflation was caused by a prolonged economic crisis as well as a wide-ranging ban on imports to prop up the faltering economy.
Zimbabwe: 2007-2008
Zimbabwe's hyperinflation is a more recent example. Its monthly inflation rate of 79.6 billion percent comes in second place after Hungary’s record inflation rate. The country’s economy had been shrinking since the 1990s and almost came to a complete standstill in 2008. This was largely caused by a lack of investment, import restrictions, and resource scarcity—particularly energy. Zimbabwe’s currency finally collapsed and was replaced by the US dollar, but the country’s economy still hasn’t fully recovered.
Hyperinflation in Germany: the current situation
For a long time, Germany didn’t have to worry much about inflation. In 1992, the inflation rate was 5%, then temporarily decreased to 0.3% and rose back to 3.1% in 2021—the highest value since 1992. But even in the current situation as of September 2022, it’s much too soon to talk about hyperinflation in Germany. Although prices for food, energy, and fuel are rising sharply, Germany’s inflation rate was 7.5% in July 2022. So, the current currency depreciation is still very moderate compared to hyperinflation. However, we are currently experiencing some global crises that are quite similar to historical events that caused hyperinflation in the past. Germany’s national debt is also increasing. Still, the current inflation is mostly due to increased energy prices, raw material shortages, and increased demand. Food prices are likely to rise even further, because corporations aren’t fully passing on their increased production costs to consumers yet.The main difference between the current situation and the situation in 1922-23 is that inflation today is not caused by a rampant monetary policy. For the first time in eleven years, the European Central Bank has even increased its key interest rate to counteract the devaluation of money and relieve the pressure on consumers. Nobody knows what the future holds, but experts don’t predict a scenario similar to the hyperinflation of 1923. Still, the current inflation rate will impact our lives significantly—especially those who already live on a tight budget. But don’t despair. We put together a few tips on how to save money fast—and our blog has even more resources to help you manage your money.
The bank you'll love
✓ 100% mobile ✓ No hidden fees ✓ No paperwork ✓ Free virtual Mastercard ✓ Investment tools
Whether it’s bread or fuel, most things are more expensive right now than they used to be. But there are still a few ways you can save money on a daily basis. Staying on top of your finances begins with understanding your spending—and with tools like N26 Insights, you can see at a glance how much money you spend and how much income you generate every month. Then, you can use budgeting methods like the 50/30/20 rule to manage your money effectively, simply, and sustainably. Who knows, you might just stumble across some unnecessary expenses like subscriptions or insurance policies that you can live without!When you’re on a budget, saving isn’t always easy—but it’s not impossible. Especially in uncertain times such as these, saving for an emergency fund and rainy day fund is a great way to give yourself some peace of mind. With N26 Spaces, you can automatically put money aside and watch your savings grow. And because every little bit counts, the N26 Round-ups feature rounds up your card payments to the nearest euro and stashes the difference into your chosen space. This way, you’ll even save when you spend money! It might just be a few pennies—but every little helps. Don’t have an N26 account? No worries! It takes a matter of minutes to sign up for one of our free or premium accounts. It’s available on both the App Store and on your desktop. Best of all, once you’ve signed up, you’ll have made the first step to achieving your budgeting goals. For more information, check out our budgeting features list.
Not sure what bulls have to do with the financial world? The term is mostly symbolic — but bull markets can have significant effects on your investments. Read on to learn what a bull market is.
If you think a bear market sounds rather scary, you’re already on the right track. In this article, you’ll learn what a bear market is, why it occurs, how it affects your assets and how long it lasts.
Not sure what bulls have to do with the financial world? The term is mostly symbolic — but bull markets can have significant effects on your investments. Read on to learn what a bull market is.
If you think a bear market sounds rather scary, you’re already on the right track. In this article, you’ll learn what a bear market is, why it occurs, how it affects your assets and how long it lasts.
