Characteristics of Hyperinflation

Though an uncommon economic condition, compared to Inflation and Deflation, the characteristics of Hyperinflation reveal the true nature of this important concept. As an important yet rare economic concept like Stagflation, Hyperinflation is characterized by an extravagant and unrestrained rise in the rate of inflation.

Though an uncommon economic condition, compared to Inflation and Deflation, the characteristics of Hyperinflation reveal the true nature of this important concept. As an important yet rare economic concept like Stagflation, Hyperinflation is characterized by an extravagant and unrestrained rise in the rate of inflation.

Characteristics of Hyperinflation:

To get a clear idea about the nature and process of Hyperinflation, it is necessary that one goes through the following general characteristic features of Hyperinflation, as mentioned and described below in brief:

• During Hyperinflation, the calculation of the credit purchase and credit sale prices are made for compensating the anticipated fall in the purchasing power incurred in the credit period. This is an equally true and relevant step, with respect to short-term credits as well.
   
• In an economy, Hyperinflation is characterized by a cumulative rate of inflation, approaching for more than 3 years of time or even surpasses, to become cent percent (100%) at times.
   
• When Hyperinflation occurs and affects the economy of a country, the financial amounts are declared in the form of a comparatively steady foreign currency. Under this circumstance, it is the price of capital goods, rents and wages, which are quoted in terms of that particular currency.
   
• In an economy, when the price index is closely associated with factors like wages, prices and rates of interest, it indicates the presence of Hyperinflation. In a hyperinflationary economy, people have a tendency for gathering wealth, both in the forms of steady foreign currencies or as non-financial assets.
   
• During Hyperinflation, there is an introduction of serious exchange controls, for safeguarding the local currencies. A country, affected by Hyperinflation has to undergo frequent interferences of its central banks.
   
• In an hyperinflationary environment, it is required that the responsibility of preparing financial statements should be taken up by the functional currency of a commercial organization. When this financial currency itself becomes the hyperinflationary economic currency, it reiterates the financial statements at the balance sheet date, as the unit of measurement. These financial statements are considered to be the purchasing power adjusted financial statements.
   
• A foreign operation performing in a hyperinflationary economy is needed for collective purposes, such as for reporting to its international parent in a steady economic condition, about the position of its functional currency. This procedure is applicable from the earliest stages of the reporting period, during which the commercial body recognizes the presence of Hyperinflation in the country’s economy, in the interest of its functional currency.
   
• When Hyperinflation affects the economy of a country, the commercial organizations operating in such an environment undergo exceptional challenges about reporting. During this period, the prices fluctuate very frequently, on a weekly or even daily basis. Hence, presentation of the financial data in nominal terms tends to reveal a false and deformed picture of the entity’s financial performances. The best way to report at the time of Hyperinflation is to modify the financial data with respect to the impact of Hyperinflation.
   
• A fall in the cumulative rate of inflation below cent percent (100%) for a period of three consecutive years, acts as an indicator of the recession of Hyperinflation from an economy. This intrinsic feature of Hyperinflation is necessary for assessing its nature, with respect to the overall economic trend and improvements of a nation. In fact, when Hyperinflation ceases to exist in an economy, there is the emergence of judgment. Accordingly, all commercial bodies in that country immediately stop the application of Hyperinflation, assuring the comparison of the financial statements from one body to another.
   
• When Hyperinflation occurs, the total available amount of local currency is invested for holding back and maintaining the purchasing power, on an emergency or immediate basis.