Inflation is a word that’s currently being used in an almost inflationary manner. But this isn’t the first time that it’s made headlines. And it probably won’t be the last. To better understand, let’s take a closer look at how inflation has reared its head around the world and the impact it has had.
What can cause a sharp increase in inflation?
Inflation is the rise in the general price level of an economy over a period of time. And if prices rise, you can buy fewer goods and services for your money. Inflation, therefore, means a decrease in purchasing power per unit of money. But instead of panicking, there are ways to minimize the impact of inflation.
But another form of assurance comes from history. Looking back at inflationary periods throughout history can not only put our current period into a larger context but also make for a fun read!
Serious Inflations in History
Greece during World War II
In World War II Greece, the value of money halved every few days.
Before the war, the Greek government budget was still running a substantial surplus, which turned into a deficit three times as large the following year. A dramatic decline in foreign trade due to the war was responsible. When the Axis powers later invaded, they forced the state to pay financial compensation to 400,000 of their soldiers. When tax revenues dwindled and Greece could no longer pay its war bills, the country resorted to its central bank to print the money it needed. The result was one of the worst cases of hyperinflation in history.
Yugoslavia after the Soviet Union’s fall
Another hyperinflation was observed in Yugoslavia. In the wake of the collapse of the Soviet Union, wars broke out in the 1990s as new sovereign nations sought independence. These refused to trade with each other, bringing economic activity to a halt. Economic sanctions from the West came in and made the situation worse. However, it was the decision of the newly formed Federal Republic of Yugoslavia to maintain communist policies that led it to spend too much money, borrow too much, and lose control over money creation. In January 1994 alone, inflation was 313 million percent. Prices doubled every 34 hours, while the currency was revalued five times in two years.
Zimbabwe in November 2008
Inflation reached an unprecedented 79 billion percent. Prices were doubling every twenty-four hours. This prompted the government to abandon its currency and use the South African rand or the U.S. dollar. After Robert Mugabe’s confiscation of private property, Zimbabwe’s economy ground to a halt for years. Attempts to redistribute land from white Zimbabweans in exchange for political capital led to a free fall in the economy, capital flight, and people fleeing to the mountains. During this period of hyperinflation, a loaf of bread cost 35 million Zimbabwean dollars.
The role of Central Banks
To prevent such scenarios, there are the economic policy measures of central banks, where they adjust their most important instrument: the key interest rate. This “controlled” inflation is intended to give consumers and producers an incentive to consume or produce – since saved money would lose value over time. This is intended to keep the economy running.
After inflation expectations in the eurozone were recently in clearly positive territory due to the Russian-Ukrainian war, central banks are currently changing their strategies after a long period of hesitation. The key interest rate is being raised in order to make borrowing more expensive, tighten the money supply, and prevent serious inflation. If you’re curious to learn how else inflation’s impact can be minimized, read more here.
What should be done during inflation?
Inflation is a normal part of many economies – and a sign that an economy is healthy. Japan, for example, has been trying unsuccessfully for a long time to breathe life into inflation in its own country.
Investing your money is an effective tactic to combat normal inflation alone. This is because the interest you receive on your savings accounts is unlikely to cover rising prices. Investments, on the other hand, offer an effective way to protect your money from losing value.
If you have already invested, you should keep a cool head, especially during strong inflation. Whether it is really time to sell certain investments in your portfolio or even to change your investment strategy requires careful consideration. It is important not to make any hasty decisions here, to remain patient, and to focus on your larger goals – like a central bank.
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