Since the 1700s, there have been 62 documented cases of hyperinflation worldwide. That is about one every five years. Over the past several months, the prices of goods and services in the U.S. have been soaring, and many fear that the nation will experience hyperinflation.
Fortunately, knowing how to prepare for hyperinflation starts with proactive steps.
What is Hyperinflation?
Hyperinflation occurs when the price of consumer goods and services increases dramatically. More precisely, hyperinflation occurs when prices grow more than 50% a month.
Consequently, individuals may struggle to afford everyday products due to higher prices. For example, the cost of groceries for a family of four can jump from $800 per month to $1,600 the following month.
Other than the increase in the price of goods and services, hyperinflation can also cause:
- Devaluation of savings accounts and investments
- Foreclosures and evictions
The best-known examples of hyperinflation include Germany in 1923 and Zimbabwe in 2007. Following World War I, Germany’s economy suffered heavily, resulting from the terms of the Treaty of Versailles. As part of the treaty agreement, Germany was required to pay reparations in gold. However, before this, the country had stopped backing its currency with gold. As a result, Germany could not meet these obligations, resulting in the devaluation of its currency. Consequently, the country experienced a daily inflation rate of 20.9%, causing prices to double every three days.
In 2008, Zimbabwe also experienced extreme hyperinflation due to political corruption, increased government debt, and numerous economic shocks, such as declining exports. As a result, prices doubled almost every day.
Causes of Hyperinflation
Inflation is not a rare event. Other than Germany and Zimbabwe, it has happened in China, Argentina, and other countries. Moreover, it is not difficult to predict what causes hyperinflation. Here are some of the major causes of inflation:
- Demand-Pull Inflation
Demand-pull inflation is the most common reason why prices rise. This happens when consumer demand for goods and services is greater than the economy’s ability to meet it. Several situations create demand-pull inflation, such as increased government spending and increased money printing.
- Cost-Push Inflation
Cost-push inflation occurs when prices rise due to an increase in the cost of production and raw materials. Higher production costs can cause companies to hike the prices of their products to maintain profit, which leads to cost-push inflation.
- Wage-Push Inflation
Wage-push inflation is the rise in the cost of goods and services that results from an increase in wages. In light of salary increases, companies typically raise the prices of their goods and services to compensate. As a result, this creates a circular effect on wages as higher wages are needed to afford the increased prices of goods and services.
Protecting Yourself from Hyperinflation
It is impossible to predict the severity and the duration of hyperinflation. Nonetheless, hyperinflation is a threat to anyone, and it is essential to prepare in the event it becomes a reality. Below are eight measures you can take to protect yourself from hyperinflation:
Pay Off Debt
Due to hyperinflation, your income may not stretch as far, causing you to have difficulty affording loan payments. As a result, you should make debt repayment a priority. Start with debts that have an adjustable interest rate, such as unsecured credit card debt. Also, consider repaying smaller-sum or shorter-term loans as these are likely easier to settle.
Reevaluate your finances and budget to see where cuts can be made to save money. For example, if you tend to eat out several times a week, alternate it with home-cooked meals. Moreover, buy cheaper alternatives for your groceries, allowing you to purchase more on the same budget. Also, if you own multiple vehicles, try to get by with only one to reduce your costs, such as payments, gas, and maintenance.
Stock up on Food and Household Products
During hyperinflation, the prices of all consumer items will rise rapidly. Therefore, it is wise to stock up on food and household products. If you are confused about what to buy before inflation hits, stockpile non-perishable food, such as pasta, rice, bread, beans, lentils, onions, potatoes, canned tomatoes, frozen fruits and vegetables, and drinking water. To ensure you have enough, it is best to stock up on necessities that can last up to three months.
Invest in Precious Metals
Precious metals such as gold, silver, platinum, and palladium are valuable during times of hyperinflation. Typically, as the value of the U.S. Dollar declines, the value of precious metals, such as gold bars, increases. For example, in the 1920s, one ounce of gold coin was worth around $20. Today, the same ounce of a gold coin is worth $2,000.
Become More Self Sufficient
During a financial crisis, people can expect food and energy shortages. Therefore, becoming more self-sufficient is essential to combat hyperinflation. For example, reduce your reliance on electricity and invest in solar cells, windmills, and hydroelectric power. Moreover, establish sustainable food and water sources by gardening, planting fruit-bearing trees, or purchasing land with a natural source of water.
Find Ways to Make Extra Money
The economic downturn caused by hyperinflation can put employees at risk of losing their jobs. Therefore, it is in your best interest to diversify your income streams. For example, you can sell custom products or videos teaching others how to become more self-sustaining.
Invest in Growth Assets
Understanding how to invest for inflation is critical to surviving the economy. When paper money loses value, real estate, growth stocks, and precious metals are valuable hedges against inflation. So, diversify your portfolio and invest in growth assets because they will likely outperform the market. Remember, never put all your eggs in one basket.
Increase Your Home’s Security
Hyperinflation often leads to civil unrest. When grocery shelves become empty and you have stocked up on essentials, your home can be a target to those who haven’t prepared for hyperinflation. Therefore, you should increase your home’s security to make it more difficult for people to break into by installing security cameras, motion-sensor lighting, and buying personal defense equipment.
The Difference Between Inflation and Hyperinflation
There is a big difference between inflation and hyperinflation. Hyperinflation is the rapid increase of the prices of goods and services within thirty days. In contrast, inflation is a sustained price increase for goods and services.
In the United States, inflation is measured by the Consumer Price Index (CPI). It tends to be around 2% annually. This means that the cost of goods and services increases by 2% every year. Unlike hyperinflation, financial experts consider inflation a sign of a healthy and growing economy.
Hyperinflation can damage a nation’s economy and lead to unprecedented levels of loss and poverty. Preparing for hyperinflation is a matter of eliminating liabilities while stockpiling household goods and products, eliminating debt and additional expenses, investing in gold, and leading a self-sufficient life.