South-Western College Publishing - Economics  
The Ravages of Inflation
Topic Employment, Unemployment, and Inflation
Key Words Hyperinflation
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Reference ID: A158942583

News Story The term "hyperinflation" is used by economist to describe a condition where the price level in a country increases rapidly and the value of the currency declines. Inflation is basically out of control. This is exactly the situation currently affecting Zimbabwe.

In the past eight months, "there's been a huge collapse in living standards," Iden Wetherell, the editor of the weekly newspaper Zimbabwe Independent said in a telephone interview, "and also a deterioration in the infrastructure - in standards of health care, in education. There's sort of sense that things are plunging."

Citing the contents of a leaked central bank document, Reuters reported recently that the prices of basic items like meat, cooking oil, and clothing had risen 223 percent in the past week alone. The government awarded all civil servants a 300 percent raise two weeks ago, but the increase is only a fraction of inflation. Doctors and nurses have been on strike for five weeks, seeking a pay increase of nearly 9,000 percent, and health care is all but nonexistent.

Hyperinflation involves an inflationary cycle that creates more and more inflation with each iteration of the cycle. Increasing prices and wages lead to higher costs of production which leads to higher prices, and the cycle continues. Economists refer to this as cost-push inflation, in this case in an out-of-control economy.

Zimbabwe's central bank has responded to the crisis by making inflation illegal. From March 1 to June 30, anyone who raises prices or wages will be arrested and punished. The result of such a policy is to stop the price increases temporarily, but it does nothing to get to the root of the problem.

"It's out of control now, and they (the government) have to bring it back in control," said John Robertson, a Harare-based economist and a frequent critic of government policies. "We're reaching the steepest slopes of the process. They say they can fix prices, but the things that cause price increase come from so many different directions that the government can't control them all."

For many the root cause of the problem is the government's failure to act. The government is characterized by corruption, and the hyperinflation is eroding the government's control over every aspect of public life.

For the government, "the big problem about Zimbabwe is that the one thing you can't rig is the economy," said one Harare political analyst, who refused to be identified for fear of being persecuted. "When it fails, it fails, and that can have unpredictable effects."

Discussion Questions:
1. Define hyperinflation and discuss its impact on Zimbabwe.
2. Discuss the notion of cost-push inflation.
Multiple Choice/True False Questions:
1. The situation in Zimbabwe includes a element of cost-push inflation. .
  1. True
  2. False
2. Hyperinflation refers to a situation where unemployment is out of hand.
  1. True
  2. False
Source Michael Wines, "As Inflation Soars, Zimbabwe Economy Plunges" The New York Times Online, February 7, 2007.
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