5.4: Three Strains of Inflation

Inflation is the sustained rise in the general price level of goods and services over time. While modest inflation is common in healthy economies, its severity can range from mild to catastrophic, with each stage affecting households, businesses, and governments differently.

Low to Moderate Inflation

Also known as mild or creeping inflation, this stage refers to annual price increases in the low single digits, typically under 5 percent. Purchasing power erodes gradually, allowing individuals and businesses to save, invest, and plan effectively for the long term. Many central banks in advanced economies, such as the United States Federal Reserve, aim for around 2 percent inflation to encourage spending while maintaining stability. The United States and much of Western Europe in the 1950s and 1960s offer examples of economies that experienced this steady and predictable inflation environment.

High or Galloping Inflation

This stage occurs when annual price increases climb into double digits, often between 20 and 50 percent, but remain below the extreme levels of hyperinflation. At this point, public confidence in the currency begins to weaken, prompting rapid spending and a preference for tangible assets such as real estate, commodities, or foreign currency. Galloping inflation is often triggered by large fiscal deficits, sustained currency depreciation, or severe supply disruptions. Brazil and Argentina in the 1980s are well-known cases, where repeated monetary reforms were undertaken to bring prices under control.

Hyperinflation

The most extreme form of inflation is hyperinflation, defined as price increases of 50 percent or more per month, which compound to thousands or even millions of percent annually. Under these conditions, money loses its function as a store of value and a medium of exchange. People often turn to barter systems or adopt stable foreign currencies, and economic activity becomes chaotic. Governments typically attempt to restore stability through currency redenomination or by introducing an entirely new currency. Germany’s Weimar Republic in 1923 and Zimbabwe in the late 2000s are two of the most famous historical examples.

Inflation is like an illness—it appears in different forms, each with its own symptoms and severity.

At its mildest, there is low to moderate inflation, where prices rise slowly and steadily, typically in the single digits each year.

People retain confidence in the value of money. They can save, invest, and plan for the future without fear of sudden changes. The economy remains stable, and financial markets operate smoothly.

Then comes the stage of galloping inflation, during which the rate of price increases to the high double or even low triple digits annually.

People begin to lose trust in the currency. They rush to spend before their money loses more value, often turning to real estate, durable goods, or foreign currency. Countries like Brazil experienced such inflationary surges during the 1980s.

At its most extreme, hyperinflation occurs. Here, prices soar uncontrollably—sometimes by several hundred to even trillions of percent a year.

The local currency becomes practically worthless. Basic transactions become chaotic as people abandon money for bartering or foreign alternatives. Economic systems break down entirely. Zimbabwe in the 2000s is a striking example.