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What is Stagflation and Hyperinflation?

 In simple terms, inflation is a measure of general increase in prices across the economy. Usually denoted in percentage (%), inflation keep fluctuating over the time. Contrary to common perception, a mild inflation is quite necessary for the growth of an economy. However, beyond a certain limit, the higher inflation rate could lead to hyper-inflation or stagflation. Inflation is a quantitative measure of the rate at which the average prices of a basket of goods and services in an economy.  

What is Hyperinflation?

When inflation rate keep rising at a faster rate, a period of hyperinflation can occur. Usually, when inflation rate keep rising at more than 50% continuously for months, the economy can grip under a period of hyperinflation. 

For example, the German inflation rate reached 30000% per month during 1920s and people started to use currency notes as a fuel in winters. 

What is Stagflation?

When an economy starts to stagnate but a higher inflation persists, it can be termed as a stagflation. It can be an economic disaster as it can ensue a poor economic growth, high unemployment and severe inflation. It rarely occurs but during 1970s, the US and UK economies suffered due to a short period of stagflation. 

Stagflation: A Nightmare for Central Banks

Stagflation is one of the most problematic situation to manage for Central Banks. It becomes difficult as there are few avenues for central banks to explore. Generally, when inflation rises beyond a certain limit, central banks like RBI or US Federal Reserve increases the interest rate (bank rate, repo rate) which reduces the money supply in the economy. But in case of stagflation, if they increase the interest rates, the credit available for businesses will be reduced so no economic expansion will take place. And that will increase the unemployment. 

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