Turkey and now Argentina have inflation around 70%
How does this happen? And how can they cope with similar interest rates by their central bank?
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Hyperinflation happens when people lose confidence in the currency which causes more hyperinflation.
Let’s say you buy and sell vegetables, this has slim margins. Normally you add 20% on to your sale price and make a 10% profit after costs.
However the last time you did that, over winter (when there was nothing to sell), elevated inflation over the winter caused your saved money to devaluate more than 10%, so this year you could only afford to buy less than last year when you get new stock.
Suddenly you, and all your fellow sellers think “I have to raise prices because I can’t have this happen again next year” – so you bump prices by 20% overnight.
This causes a feedback loop, the shop who buys your vegetables puts prices up 40%. Every goods/service provider starts to worry “I might end up losing money due to inflation, I have to increase my margins to maintain profitability.” Every consumer starts to think “I can afford potatoes this month, but I might not be able to next month”, so people start spending all their money the moment they earn it. The sudden surge in demand pushes the prices up further. Workers start to demand daily pay increases to keep up with basics like food and rent, companies have to raise prices to keep paying workers. The government has to start printing money to be able to pay public sector workers and everything else the government pays for since it can’t keep up with the rising prices via taxation. This adds fuel to the fire with extra money supply.
Foreign companies start to not want to trade in your currency, so start charing huge 2-3x cost premiums for imports because its going to be really difficult for them to exchange the currency back to their currency.
Inflation is now completely out of control.
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