Galloping inflation

Galloping inflation is a rapid increase in the general price level, typically running between 10% and 100% per year (Blanchard O. 2021, p.187)^[1]. Not quite hyperinflation—where prices double monthly and money becomes worthless—but bad enough. Savings evaporate. Business planning becomes guesswork. Ordinary people watch their purchasing power crumble week by week.

The term captures something visceral. Prices don't creep. They gallop. And like a runaway horse, galloping inflation tends to accelerate unless aggressively reined in.

Defining the boundaries

Economists disagree on exact thresholds. Some define galloping inflation as anything above 10% annually. Others use 20% as the floor. The upper bound matters too—is 50% still galloping, or has it crossed into hyperinflation?

A reasonable taxonomy:

• Creeping inflation: 1-3% annually (most central banks' target range)
• Walking inflation: 3-10% (uncomfortable but manageable)
• Galloping inflation: 10-100% (severely disruptive)
• Hyperinflation: Above 50% monthly, or roughly 100%+ annually

Phillip Cagan's classic 1956 definition sets hyperinflation at 50% per month—prices more than doubling every two months^[2]. Below that threshold but above single digits sits galloping inflation's uncomfortable middle ground.

Historical examples

Galloping inflation isn't rare. Dozens of countries have experienced it since World War II.

Latin America (1970s-1990s). Argentina's inflation averaged 130% annually during the 1980s. Brazil peaked at 2,477% in 1993. Chile, Peru, Bolivia—the entire region seemed cursed by double and triple-digit price increases. Governments printed money to cover deficits. Citizens learned to spend paychecks immediately before prices rose further^[3].

Post-war United States (1946-1948). Inflation hit 18% in 1946 as wartime price controls ended. Pent-up demand met constrained supply. By 1948, prices had risen 35% from pre-war levels. The Fed tightened, recession followed, but the monetary system survived intact.

Turkey (2001-2002). Financial crisis drove inflation above 70%. The lira collapsed against the dollar. Recovery took years and required painful structural reforms plus IMF intervention.

Russia (1992-1995). The Soviet collapse unleashed chaos. Inflation ran 2,500% in 1992 alone. Technically hyperinflation. By 1995, it had "stabilized" at around 130%—still galloping, but the ruble no longer required wheelbarrows^[4].

Nigeria (1994-1996). Oil prices fell, government deficits soared, the naira depreciated sharply. Inflation exceeded 70% before stabilization efforts took hold.

Causes

No single factor creates galloping inflation. It typically results from some combination of:

Excessive money supply growth. When central banks print money faster than economies produce goods, prices rise. Simple arithmetic—more currency chasing the same goods means each unit buys less. Milton Friedman's famous line: "Inflation is always and everywhere a monetary phenomenon" (Mishkin F.S. 2019, p.456)^[5].

Fiscal deficits funded by money creation. Governments that spend far beyond tax revenues face choices: borrow at ever-higher interest rates, default, or print. The printing press offers short-term escape but long-term disaster.

Supply shocks. The 1970s oil crises demonstrated how supply disruptions can spark inflation. Energy costs feed through to everything—transportation, manufacturing, heating. Prices spiral upward.

Exchange rate collapse. When a currency loses value externally, import prices jump. Countries dependent on foreign goods—food, fuel, machinery—see domestic prices surge even without local policy errors.

Wage-price spirals. Workers demand raises to keep pace with inflation. Companies pass higher labor costs to customers. Prices rise further. Workers demand more raises. The spiral feeds itself.

Loss of confidence. Perhaps most destructive. Once people expect high inflation, they act accordingly—spending immediately, demanding higher wages, raising prices preemptively. Expectations become self-fulfilling^[6].

Economic effects

Galloping inflation distorts economies in predictable ways:

Savings destruction. A 50% annual inflation rate cuts purchasing power in half every year. Retirement savings accumulated over decades vanish. Fixed-income pensioners face poverty. The incentive to save disappears—why hold currency that loses value daily?

Investment uncertainty. Business investment requires projecting future costs and revenues. When prices move unpredictably, these projections become meaningless. Companies delay capital expenditures. Economic growth stalls.

Menu costs. Literally the cost of reprinting menus—or more broadly, the resources consumed by constant price adjustments. During Brazil's high-inflation years, supermarkets employed workers whose sole job was remarking prices multiple times daily^[7].

Shoe-leather costs. The effort spent minimizing cash holdings. Bank trips to move money into inflation-protected instruments. Time wasted managing something that should be stable.

Income redistribution. Fixed incomes lose value. Wages lag prices. Debtors gain (they repay with cheaper money) while creditors lose. These transfers are arbitrary and often regressive—hitting the poor hardest.

Price signal distortion. Markets allocate resources through prices. When all prices rise rapidly, genuine scarcity signals get lost in the noise. Producers can't tell if their product's price increase reflects demand or general inflation.

Social and political consequences

Beyond economics, galloping inflation erodes social fabric.

Trust in government collapses. Officials promising stability deliver chaos. Elections shift toward populists offering radical solutions. Germany's Weimar hyperinflation contributed—though didn't solely cause—the Nazi rise. Argentina's endless crises produced cycles of military coups and unstable democracies^[8].

Social cohesion weakens. Those with assets that hedge inflation (real estate, gold, foreign currency) preserve wealth. Wage earners and savers lose. The divide fuels resentment.

Crime increases. When legal earnings can't keep pace with prices, black markets flourish. Currency controls spawn elaborate smuggling operations. Corruption becomes survival strategy.

Combating galloping inflation

Stopping the gallop requires painful choices:

Monetary tightening. Central banks raise interest rates dramatically—sometimes to 50% or higher. High rates make borrowing expensive, slow spending, and signal commitment to price stability. But they also crush economic activity. Recession typically follows.

Fiscal discipline. Governments must close deficits. Spending cuts. Tax increases. Neither popular. Politicians who implement them often lose office—even when successful.

Exchange rate stabilization. Some countries peg their currency to a stable foreign currency (typically the dollar or euro). The peg forces monetary discipline. Argentina tried this with its Convertibility Plan in 1991; inflation dropped from 3,000% to near zero within two years^[9].

Price controls. Tempting but rarely effective. Controls suppress inflation's symptoms while leaving causes intact. Remove them and prices explode. Extended controls create shortages, black markets, and distorted production.

Wage-price freezes. Similar to price controls. Temporarily popular but ultimately self-defeating.

Currency reform. Sometimes a fresh start helps psychologically. Brazil's Real Plan (1994) introduced a new currency alongside fiscal and monetary reforms. Inflation dropped from 2,000% to under 10%—and stayed there.

The inflation-unemployment tradeoff

The Phillips Curve suggests inverse relationship between inflation and unemployment—at least in the short run. Fighting inflation means accepting higher unemployment. Policymakers face ugly choices^[10].

Paul Volcker's Fed demonstrated this starkly. To break 1970s inflation, Volcker raised interest rates until unemployment hit 10.8% in 1982—the highest since the Depression. Inflation fell from 13% to 3%. The cure worked but caused genuine suffering.

Modern central banks try to act early, before inflation gallops. Small rate increases at walking-inflation stage hurt less than drastic action later. The credibility earned by consistent anti-inflation policy makes the job easier—people trust the central bank will act, so expectations stay anchored.

Warning signs

How do you know galloping inflation is coming? Watch for:

• Rapid money supply growth without corresponding output increases
• Large sustained government deficits
• Currency depreciation
• Rising inflation expectations in surveys
• Shortening of contract terms (from annual to monthly pricing)
• Dollarization—citizens preferring foreign currency for transactions
• Gold and real estate price spikes

By the time inflation reaches galloping pace, stopping it becomes far harder than prevention would have been. The policy lesson: act early and credibly^[11].

Galloping inflation — recommended articles

Investment — Economic trend — Financial planning — Monetary policy

References

• Blanchard O. (2021), Macroeconomics, 8th Edition, Pearson, Boston.
• Cagan P. (1956), The Monetary Dynamics of Hyperinflation, in Studies in the Quantity Theory of Money, University of Chicago Press.
• Mishkin F.S. (2019), The Economics of Money, Banking, and Financial Markets, 12th Edition, Pearson, Boston.
• Reinhart C.M., Rogoff K.S. (2011), This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press.
• Sargent T.J. (2013), Rational Expectations and Inflation, 3rd Edition, Princeton University Press.

Footnotes

1. ↑ Blanchard O. (2021), Macroeconomics, p.187
2. ↑ Cagan P. (1956), The Monetary Dynamics of Hyperinflation
3. ↑ Reinhart C.M., Rogoff K.S. (2011), This Time Is Different, pp.178-195
4. ↑ Sargent T.J. (2013), Rational Expectations and Inflation, pp.89-112
5. ↑ Mishkin F.S. (2019), The Economics of Money, Banking, and Financial Markets, p.456
6. ↑ Blanchard O. (2021), Macroeconomics, pp.192-198
7. ↑ Reinhart C.M., Rogoff K.S. (2011), This Time Is Different, pp.234-245
8. ↑ Sargent T.J. (2013), Rational Expectations and Inflation, pp.145-167
9. ↑ Mishkin F.S. (2019), The Economics of Money, Banking, and Financial Markets, pp.478-492
10. ↑ Blanchard O. (2021), Macroeconomics, pp.215-228
11. ↑ Mishkin F.S. (2019), The Economics of Money, Banking, and Financial Markets, pp.503-518

Author: Sławomir Wawak