Hyperinflation is a nightmare scenario for business owners and the economy as a whole. It doesn’t matter what rung of the economic ladder you are on – if your nation begins to experience hyperinflation, it signals deep financial trouble. It can arguably be worse for those with a lot of money as it sees their overall wealth disintegrate in real time.
Although different countries have different ideas of the ideal level of inflation, most would agree that anywhere from 2% to 5% is considered optimal. Inflation rates don’t just measure the price of goods and services, they go beyond that and signal the underlying issues within an economy.
The risks of high inflation
When a country is experiencing high inflation or is on the verge of hyperinflation, it is usually twinned with some deep social or political unrest – and often, it is both. For example, the current issues in Venezuela have signaled a total collapse in their currency, and hyperinflation has become rampant. As a result, millions of Venezuelans have fled the country to other South American nations, hoping to find a more stable economy and better quality of life.
Venezuela has the highest rate of inflation in the world. Although it is down from the million percentiles we saw over the last few years, it is still at a staggering and completely unmanageable level, exceeding 1000%.
This isn’t a list you want your country to end up on. In second place in this unfortunate collection of nations is Sudan, with an inflation rate of over 300%. It is no surprise that there is currently mass unrest in the country and as we have already touched on, these issues often combine to create a hurricane of untenable living conditions.
Issues that businesses face
We’re sure you’re already aware of some of the issues that affect businesses when facing the negative consequences of everything we discussed in our previous section.
However, when hyperinflation is on the cards, a whole host of other business-specific issues occur. For instance, banks will likely recall any loans you have outstanding as they look to recoup everything they can before the currency descends to a level of worthlessness.
In addition, depending on your business type, you could face horrendous spiraling costs at every level of the supply chain. For example, if you own a store, your electric bills will skyrocket and the costs of doing business with others in the supply chain will rapidly become unmanageable.
It is arguably the worst scenario you could face as a business owner, but can you prepare for such a rare and devastating scenario?
Consider alternative pricing
You can use the US dollar instead of the local currency in several countries. This can help business owners mitigate costs and continue to trade even in the event of rampant hyperinflation. One of the most prominent examples of this is Cambodia.
Cambodia is a country that has a turbulent and sad history. The US dollar is officially accepted because the Cambodian riel is subject to serious volatility. Although there have been discussions within Cambodia and with other countries in Asia to reduce their dependency on the US dollar, its use is engrained and it is widely accepted in the country.
While this does come with some negative issues, if hyperinflation involves the riel, any problems will be safely managed due to the ample supply of US dollars available in the Cambodian economy.
In times of hyperinflation, if a country introduces a strong world currency such as the US dollar or euro as an alternative payment system, this can shore up disastrous short-term losses and help manage the risk.
Another type of alternative pricing is to raise prices in line with hyperinflation. Unfortunately, this is often the only option for many poorer countries, and it can see them changing the price of their goods four or five times a day in extreme instances.
This can be discouraged by central governments and banks as it can result in a situation whereby the inflation rate continues to worsen, and businesses start playing their role in pushing the inflation beyond any sort of manageable, redeemable level, so this isn’t the best advice but it is a common tactic.
It is critical to point out that the current rate of US inflation could be better but is also not at hyperinflationary levels. If the American economy were to experience hyperinflation, the world would be in an incredibly dark economic predicament.
The most effective way to battle hyperinflation is through alternative payment methods, and depending on the type of business you own, to plan accordingly and in advance. If you can anticipate hyperinflation, you may be best placed to protect yourself from the worst of it.