UNIVERSITY OF CENTRAL PUNJAB

Course Instructor: Prof. Bader

Subject: Economics
Project: Hyper Inflation
Department: B.S-A&F
Semester: 03
Submitted by :
 Abdullah Bin Zafar (0029)
 Waleed Naveed (0030)
Date of Submission: 19-02-2020
Remarks____ Checked by____

1
Contents
INFLATION:..................................................................................................................................................3
Types of inflation:....................................................................................................................................3
1: Creeping Inflation:...........................................................................................................................3
2: Walking Inflation:.............................................................................................................................3
3: Galloping Inflation:..........................................................................................................................4
4: Hyperinflation:.................................................................................................................................4
5: Stagflation:......................................................................................................................................4
6: Core Inflation:..................................................................................................................................4
7: Deflation:.........................................................................................................................................5
8: Wage Inflation:................................................................................................................................5
9: Asset Inflation:.................................................................................................................................5
Main causes of inflation:......................................................................................................................6
Effects:.................................................................................................................................................6
Hungary’s hyperinflation:............................................................................................................................7
Causes:..................................................................................................................................................10
Effects:...................................................................................................................................................10
Inflation.....................................................................................................................................................11

INFLATION:

2
Inflation is a quantitative measure of the rate at which the average price level of a basket of
selected goods and services in an economy increases over a period of time. It is the constant rise
in the general level of prices where a unit of currency buys less than it did in prior periods. Often
expressed as a percentage, inflation indicates a decrease in the purchasing power of a nation’s
currency.

Types of inflation:

There are four main types of inflation, categorized by their speed. They are creeping, walking,
galloping and hyperinflation. There are specific types of asset inflation and also wage inflation.

1: Creeping Inflation:

Creeping or mild inflation is when prices rise 3% a year or less. According to the Federal
Reserve, when prices increase 2% or less it benefits economic growth. This kind of mild
inflation makes consumers expect that prices will keep going up. That boosts demand.
Consumers buy now to beat higher future prices. That's how mild inflation drives economic
expansion. For that reason, the Fed sets 2% as its target inflation rate.

2: Walking Inflation:

This type of strong, or pernicious, inflation is between 3-10% a year. It is harmful to the
economy because it heats up economic growth too fast. People start to buy more than they
need, just to avoid tomorrow's much higher prices. This drives demand even further so that
suppliers can't keep up. More important, neither can wages. As a result, common goods and
services are priced out of the reach of most people.

3: Galloping Inflation:

3
 When inflation rises to 10% or more, it wreaks absolute havoc on the economy. Money loses
value so fast that business and employee income can't keep up with costs and prices. Foreign
investors avoid the country, depriving it of needed capital. The economy becomes unstable,
and government leaders lose credibility. Galloping inflation must be prevented at all costs.

4: Hyperinflation:

Hyperinflation is when prices increased rapidly more than 50% a month. It is very rare. In
fact, most examples of hyperinflation have occurred only when governments printed money
to pay for wars. Examples of hyperinflation include Germany in the 1920s, Zimbabwe in the
2000s, and Venezuela in the 2010s. The last time America experienced hyperinflation was
during its civil war.

5: Stagflation:

Stagflation, or recession-inflation, is a situation in which the inflation rate is high, the

economic growth rate slows, and unemployment remains steadily high. It presents a dilemma
for economic policy, since actions intended to lower inflation may exacerbate
unemployment.

6: Core Inflation:

The core inflation rate measures rising prices in everything except food and energy. That's
because gas prices tend to escalate every summer. Families use more gas to go on vacation.
Higher gas costs increase the price of food and anything else that has large transportation
costs. The Federal Reserve uses the core inflation rate to guide it in setting monetary policy.
The Fed doesn't want to adjust interest rates every time gas prices go up.

7: Deflation:

4
 Deflation is the opposite of inflation. It's when prices fall. It's caused when an asset
bubble bursts. That's what happened in housing in 2006. Deflation in housing prices trapped
those who bought their homes in 2005. In fact, the Fed was worried about overall deflation
during the recession. That's because deflation can turn a recession into a depression. During the
Great Depression of 1929, prices dropped 10% a year. Once deflation starts, it is harder to stop
than inflation.

8: Wage Inflation:

Wage inflation is when workers' pay rises faster than the cost of living. This occurs in three
situations. First, is when there is a shortage of workers. Second, is when labor unions negotiate
ever-higher wages. Third is when workers effectively control their own pay.

A worker shortage occurs whenever unemployment is below 4%. Labor unions negotiated higher
pay for auto workers in the 1990s. CEOs effectively control their own pay by sitting on many
corporate boards, especially their own. All of these situations created wage inflation.

Of course, everyone thinks their wage increases are justified. But higher wages are one element
of cost-push inflation. That can drive up the prices of a company's goods and services.

9: Asset Inflation:

An asset bubble, or asset inflation, occurs in one asset class. Good examples are housing, oil and
gold. It is often overlooked by the Federal Reserve and other inflation-watchers when the overall
rate of inflation is low. But the subprime mortgage crisis and subsequent global financial crisis
demonstrated how damaging unchecked asset inflation can be.

Main causes of inflation:

5
  Demand-pull inflation – aggregate demand growing faster than aggregate supply
(growth too rapid)
 Cost-push inflation – For example, higher oil prices feeding through into higher
costs.
 Devaluation – increasing cost of imported goods, and also the boost to domestic
demand.
 Rising wages – higher wages increase firms costs and increase consumers’
disposable income to spend more.
 Expectations of inflation – causes workers to demand wage increases and firms to
push up prices.

Some experts say demand-pull and cost-push inflation are two more types, but they are
causes of inflation. So is expansion of the money supply.

Effects:

1. Erodes Purchasing Power

2. Encourages Spending, Investing

3. Causes More Inflation

4. Raises the Cost of Borrowing

5. Lowers the Cost of Borrowing

6. Reduces Unemployment

7. Increases Growth

8. Reduces Employment, Growth

Hungary’s hyperinflation:

6
Hungary was no stranger to hyperinflation. The Austro-Hungarian Empire was on the losing
side of World War I and was broken up after the war. The new nation of Hungary lacked the
proper government structures, so it turned to printing money to fill the hole in its budget. Before
World War I, there were 5 Kronen to the US Dollar, but by 1924 there were 70,000 Kronen to
the US Dollar. So Hungary replaced the Kronen with Pengö at the rate of 12,500 Pengö to the
Kronen in 1926.

Hungary was spared much of World War II’s destruction until 1944 when it became a
battleground between Russia and Germany, and half of Hungary’s industrial capacity was
destroyed and 90% was damaged. Transportation was difficult because most of the rail lines and
locomotives had been destroyed. What remained had either been taken by the Nazis back to
Germany or seized as reparations by the Russians.

Prices were already rising in Hungary after the war because production capacity fell due to the
destruction. With no tax base to rely upon, the Hungarian government decided to stimulate the
economy by printing money. It loaned money to banks at low rates who then loaned the money
to companies. The government hired workers directly, they provided loans to consumers, and
they gave money to people. The government literally flooded the country with money to get the
economy going again. Money may not have grown on trees, but it certainly flowed off the
printing presses.

To see how quickly the money supply rose, consider the fact that the currency in circulation
stood at 25 billion Pengö in July 1945, rose to 1.646 trillion by January 1946, to 65 quadrillion
(million billion) Pengö by May 1946 and to 47 septillion (trillion trillion) Pengö by July 1946.

How bad was the inflation? Something that cost 379 Pengö in September 1945, cost 72,330
Pengö by January 1945, 453,886 Pengö by February, 1,872,910 by March, 35,790,276 Pengö by
April, 11.267 billion Pengö by May 31, 862 billion Pengö by June 15, 954 trillion Pengö by June
30, 3 billion billion Pengö by July 7, 11 trillion billion Pengö by July 15 and 1 trillion trillion
Pengö by July 22, 1946. Obviously, the inflation was devastating to the mathematically
challenged.

7
At the height of the inflation, prices were rising at the rate of 150,000% PER DAY. By then, the
government had stopped collecting taxes altogether because even a single day’s delay in
collecting taxes wiped out the value of the money the government collected.

Before the war, in March 1941, there were 5 Pengö to the US Dollar, by June 1944, there were
33 Pengö to the USD and in August 1945 when the real hyperinflation began, there were already
1320 Pengö to the USD. Then, the Pengö collapsed. There were 100,000 Pengö to the USD by
November 1945, 1.75 million by March 1946, 59 billion by April 1946, 42 quadrillion by May
1946 and 460 trillion trillion by July 1946.

Of course, Hungary had taken some failed measures to reduce the inflation. In December 1945,
the government imposed a 75% capital levy by making people turn in 400 Pengö and receive 100
Pengö back with a stamp on the banknotes to indicate they were legal tender. But they didn’t
stop printing money. The hyperinflation made it even more difficult for the government to
collect taxes, so they introduced the Adopengö which supposedly was indexed to inflation, but
even the indexed Adopengö succumbed to the inflation. By July 1946 there were 2 million
trillion Adopengö to the Pengö.

So how did people cope with this onslaught of money? How did the government that printed the
money handle so many zeroes? The solution was simple: change the name of the currency. The
Pengö was replaced by the Milpengö (1,000,000 Pengö) which in turn was replaced by the
Bilpengö (1,000,000,000,000 Pengö) which was replaced by the inflation-indexed Adopengö.

Hungary Milliard Bilpengo1

Global Financial Data

The banknotes would have the same picture on them, but be a different color. The Milliard
Pengö was lavender, the Milliard Milpengö was blue and the Milliard Bilpengö was green, but
except for the color, the notes looked alike. Someone who lived through the hyperinflation said
they gave up on looking at the denominations and when someone bought something the cashier
would say that their bread cost them two blues and a green. The Milliard Bilpengö, pictured
here, is the highest denomination note ever printed since it was equal to a Billion Trillion Pengö.
Unfortunately, at the end of the inflation, it was only worth about twelve cents USD.

8
The Forint replaced the Pengö on August 1, 1946 at the rate of 400,000 Quadrillion Pengö to the
Forint; however, the stabilization worked, and prices remained relatively stable in Hungary into
the 1960s. As for all the old Pengö, they were thrown away because they were worthless.

Who paid the price of the inflation? First off, workers did. Real wages fell by over 80% as a
result of the inflation, and though the workers had jobs, they were pushed into poverty by the
hyperinflation. Creditors were wiped out. But production did recover, and by August 1946, the
Pengö was replaced by the Forint which Hungary still uses today.

So did the inflation achieve the goal of stimulating production? The hyperinflation did raise
Hungary’s industrial capacity, got the railroads moving again, and got much of the capital stock
replaced. However, workers lost 80% of their wages and creditors were wiped out.

Politically, however, Hungary’s fate was sealed by the Communists, who eventually seized
power and turned the Republic of Hungary into the People’s Republic of Hungary in 1949 with a
new constitution modelled on that of the Soviet Union.

9
 Causes:

 The reason of hyperinflation in hungry was World War 1.

 The other reason of hyperinflation in hungry was world 2.
 Hungry became the place of destruction between Russia and Germany in world 2.
 Hungry transportation is destroyed.
 Hungry do not have machine to print their own money.
 At the time of inflation the prices was rising 150000% per day.

Effects:
 Hungarian was on losing side in world war 1 that effect their currency they have to
use Korean money which was equal to 5 dollar to 1 us dollar.
 90% of economy was destroyed due world war 2 it also badly effect their
transportation which effect their business that also inflation as unemployment
increase.
 Hungry decided to print their own money called pengo which have no worth at time
almost 70000 pengo is equal one us dollar.
 Government of hungry try to give loans to worker of simulation of money but latter
they have collect money with out having tax on it.

10
 Inflati
Year on
s rate
21.509
1992 18
21.278
1993 46
19.491
1994 06
26.732
1995 79
21.930
1996 28
20.260
1997 8
13.767
1998 24
8.1202
1999 64
9.5834
2000 84
11.046
2001 56
8.0915
2002 14
5.4439
2003 77
5.0898
2004 48
2.6266
2005 02
3.6589
2006 9
5.4407
2007 02
2008 4.7895
11
 24
4.1913
2009 23
2.3836
2010 09
2.1821
2011 36
3.2007
2012 11
2.9785
2013 49
3.5904
2014 3
2.4556
2015 26
0.9728
2016 45
3.7042
2017 3
4.5286
2018 91

Inflation rate
30

25

20

15

10

0
1990 1995 2000 2005 2010 2015 2020

12