Last week we looked at how inflation is measured. This week, we discuss why it is so important to remain vigilant to the threat it poses if left unchecked.
We previously defined inflation as the rate at which the general level of prices in the economy rises over time, or the rate of decline in the buying power of the dollar. Many Americans are too young to have experienced the phenomenon in earnest. It is important to keep it that way.
Our last taste of really damaging inflation in the United States occurred between 1964 and 1982. Dubbed “the Great Inflation” by economists (a clever lot when it comes to monikers), policy errors were compounded by two energy supply shocks from OPEC oil embargoes. Inflation peaked at nearly 15 percent in 1980, a pace that doubled prices of consumer goods every five years. Not the worst in our history, but painful and disruptive nonetheless.
Christopher A. HopkinsMany countries have allowed this phenomenon to gallop out of control, leading ultimately to economic collapse. Venezuela is a real-time example today. A country rich in oil reserves, Venezuela has suffered devastating mismanagement and corruption that has destroyed the country’s currency. While official figures are scarce, estimates are that prices are soaring at 4,000 percent per year. Economists call this kind of runaway scenario a “hyperinflation.” Imagine prices of milk and bread doubling every two weeks and you’re in the ballpark.
Perhaps the most famous example of hyperinflation is that of post-war Weimar Germany. Following the end of World War I in 1918, the country loaded up on debt and fired up the printing presses to pay for post-war reconstruction. As more and more German Marks were issued, the value of each began to dive until the currency was virtually worthless. Finally, in 1923, the Weimar government issued a one thousand billion Mark note, with a value of approximately 25 U.S. cents.