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Insights from the Global South The sky’s the limit: The economics of inflation and hyperinflation

Money is essential to a market economy, serving as a store of value, a unit of account, and a means of exchange. All of these functions are compromised by high inflation. This Insight explores the multiple mechanisms that underlie inflation, from low to extremely high levels, and discusses policy solutions.

Author

Authored by Paul Segal (IAE Business School, Austral University, Argentina).

11 September 2025

Concepts

Concepts in this Insight are related to material in:


Recommended reading before starting this Insight:

  • Sections 1.5–1.7 of The Economy 2.0: Macroeconomics, which cover the WS–PS model
  • Sections 4.4–4.6 of The Economy 2.0: Macroeconomics, which cover inflation and the Phillips curve.

Highlights

  • Money is one of the foundations of a market economy, and serves three functions: as a store of value, as a unit of account, and as a means of exchange. High inflation affects all three functions of money.
  • Inflation arises through conflicting demands between firms and workers, and can be modelled using the wage-setting/price-setting (WS–PS) and Phillips curve models.
  • Changes in international prices affect the terms of trade (relative price of imports to exports), which in turn affect how domestic output is distributed between the home country and its foreign trading partners. Anchored inflation expectations are important for preventing a wage–price spiral after a negative terms-of-trade shock.
  • The nominal exchange rate (the price of foreign currency in terms of domestic currency) can affect inflation. A nominal depreciation (where imports become more expensive in domestic currency) can lead to a depreciation–inflation spiral as prices rise for goods that are imported or have imported inputs. The policy interest rate affects demand for domestic currency, making it an important tool for managing both the exchange rate and its impact on inflation.
  • Unsustainable government debt in foreign currency with high interest payments, corresponding to a large current account deficit, can lead to high inflation. Managing this debt with fiscal and monetary policy is challenging, and debt restructuring is often required.
  • Printing money does not necessarily lead to inflation (for example, quantitative easing during the global financial crisis did not lead to inflation), but can do so if it is driven by an unsustainable fiscal deficit.
  • Hyperinflation (defined as inflation of at least 50% per month for more than two months) is a self-reinforcing process that causes domestic currency to lose its function as money. Many hyperinflation episodes have been the result of unmanageable foreign debt. Tackling hyperinflation requires a combination of foreign debt restructuring, policies that lower the fiscal deficit, and a credible inflation anchor (such as fixing the exchange rate to the US dollar).