Galloping inflation is a type of inflation that is particularly evident. The price level rises rapidly, while at the same time the value of money decreases rapidly.
In this lesson we will show you the main characteristics of galloping inflation, typical reactions of market participants and give you an impression of their effects on an economy using a few historical examples. Finally, you can test your newly acquired knowledge with a few practice questions.
Runaway inflation is often used as a synonym for hyperinflation, but the latter is an even stronger type of inflation. In contrast, the English term “hyperinflation” is used as an equivalent for galloping and hyperinflation.
Why should you know galloping inflation?
According to gradinmath, galloping inflation is usually also open inflation, as the effects can no longer be discussed away. Reactions on the part of the individual economic operators can be observed, which do not occur in the event of creeping or hidden inflation.
Features of galloping inflation
The classification of the various types of inflation was in most cases arbitrary. In the meantime, however, an inflation rate of 20% and more has become established in many places in the literature, from which the talk is of galloping inflation.
It is characterized above all by the rapid loss of purchasing power and the associated reaction on the part of consumers to spend money once they have received it again as quickly as possible. As a result , in addition to the money supply, the speed of circulation of money continues to increase, which further intensifies the negative effects.
Historically, galloping inflation is a more recent phenomenon that hardly existed anywhere before the 20th century. This extreme form of inflation arose in most cases as a result of political upheavals, economic crises and wars.
In the past, if a certain rate of inflation was exceeded, one went straight to unminted precious metals as a currency substitute or one made do with an exchange in kind. However, the situation has changed due to the spread of uncovered money (fiat money) that can be increased comparatively easily. If the state uses and increases this money to such an extent that it leads to inflation, the point will soon be reached where there is no going back and the loss of monetary value can no longer be stopped.
The origin of such inflation is almost always to be found in wrong government action. Even if this allows the state to completely repay its debts, it triggers an economic crisis that can have devastating consequences for most of those involved.
Galloping inflation: Characteristics and comparison to trotting and creeping inflation
Consequences and countermeasures of galloping inflation
Due to the massive loss of monetary value and the continuous price increases, demand collapses. The currency is no longer trusted, which is why many citizens resort to tangible assets and barter.
In such times, inflation-proof tangible assets, especially precious metals, are particularly in demand. A flight of capital into foreign exchange (foreign currencies) also sets in, which further diminishes confidence in one’s own currency. The only way to counteract this and end inflation at such an advanced stage is through currency reform.
Example: Galloping inflation in Germany
The inflation of 1923 was the last galloping inflation in Germany and is now regarded as a late consequence of the First World War. The high reparation payments that Germany had to make weighed heavily on the economy. Then there were the war bonds with which the citizens had advanced money to the state.
The situation worsened in 1923 with the occupation of the Ruhr area. While on the one hand people called for sabotage, on the other hand wages continued to be paid out. In addition, the government began to print and circulate more money. For this money, however, there was no real equivalent, which is why a runaway inflation set in, which later even grew into hyperinflation.
The end was typical for an inflation of this kind: Confidence in the currency was completely lost and a new one was temporarily established with the Rentenmark.