Inflation has been a hot-button issue for the last year or so. With inflation readings hitting levels not seen in multiple decades, rising shelter, energy, and food prices have started to negatively affect the American economy.
Over the last couple of months, consumer prices have begun to stabilize, indicating that the worst of inflation may be over. Still, pundits continue to stoke fears on financial media by saying the United States could be headed for hyperinflation, a consequence that would equate to the destruction of our modern economic system. Here's what hyperinflation means and why these fears are totally overblown (at least in the United States).
What is hyperinflation?
Hyperinflation is rapid month-over-month inflation that throws an economy into a tailspin. The threshold for hyperinflation is not sharply defined, but a good one I like to use is when consumer prices start increasing by 50% every month. That would mean a $100 grocery bill turns into $150 a month later and then over $1,000 six months hence.
Rapid price increases are impossible for businesses and individuals to manage, throwing economies way out of balance. It incentivizes people to buy things as fast as possible and never lets wages/personal incomes catch up to rising prices. This creates a runaway effect that is impossible to stop, which happened to Weimar Germany in the 1920s. Inflation got so bad due to poor decision-making by the government and World War I reparation bills that citizens couldn't even afford a daily newspaper because prices were rising so quickly.
As recently as this week, investors on the financial news networks claimed that the U.S. economy is headed for a situation similar to Weimar Germany. While this obviously doesn't pass the smell test if you go to the grocery store or the gas station, let's take a look at some data and see if this is showing up anywhere in our economy at the moment.
Looking at the payments networks, there is no evidence of hyperinflation
According to the U.S. government, the Consumer Price Index (CPI) rose 6.5% year over year in December, the lowest reading since October 2021. In fact, prices have been roughly stable in the United States since June 2022, which is after the economy absorbed the shocks of the Russian invasion of Ukraine.
Don't trust the government data? Don't worry, because there are some perfect businesses that can act as inflation-measuring proxies: the credit card networks Visa (V -0.05%) and Mastercard (MA 0.31%). The majority of consumer spending in the United States is now done by credit and debit cards, which are powered by the Visa and Mastercard networks, along with a few other, smaller competitors. These companies update investors every quarter on the growth of total payment volume through their card networks. A hyper-inflationary environment would cause this growth to rapidly accelerate as people start spending 10 times as much on food, gasoline, and other bills with their credit cards.
So what was the payment volume growth at Visa and Mastercard in the fourth quarter of 2022? Payment volumes increased slightly under 10% year over year at both companies, which would put their figures in line with the overall inflation reported by the government. Of course, this is not an exact comparison, as Visa or Mastercard are not the only methods people use to pay for things. But with such prevalence across our country, I think it is a pretty darn good indicator for anyone worried about runaway inflation.
There are major hyperinflation fears for countries like Argentina, which currently has annual inflation approaching 100%. This is a pressing issue if you live there, but for anyone in the United States, all these fears about hyperinflation have been vastly overblown. Sure, it can cause major stress for individuals who live paycheck to paycheck if consumer prices rise 5%-10% annually, but it doesn't mean the U.S. economy is about to collapse.
