Hyperinflation is the most extreme form of inflation. The most widely accepted definition of hyperinflation comes from Philip Cagan (1956), who set the threshold at 50% inflation per month. However, I modernized and operationalized hyperinflation measurements by using daily implied inflation rates, derived from changes in the black-market exchange rate.
To formalize and record events of hyperinflation, Nicholas Krus and I created a framework to identify all known cases of hyperinflations in history to identify the start and end dates of each episode, peak inflation rates, duration, policy triggers, and currency breakdowns. This dataset is the most reliable and definitive academic reference on the subject.
Hanke's PPP Methodology: How to Measure Inflation When Governments Lie
When a government stops publishing inflation statistics — or publishes falsified data — Professor Hanke uses Purchasing Power Parity (PPP) derived from black-market exchange rates to reconstruct true inflation.
The Inflation Equation
The core formula is:
Where:
- Inflation_A = implied inflation in Country A (the troubled currency country)
- Inflation_B = inflation in Country B (the anchor currency, e.g., the USA)
- E_AB = the black-market exchange rate between currency A and currency B
- ΔE_AB = change in the exchange rate over the measurement period
In Plain English
If the black market rate for U.S. dollars in Venezuela is rising at 10% per week, that tells us the bolivar is losing 10% of its purchasing power per week — regardless of what the government's official statistics say. Multiply that by 52 weeks and you get the true annual inflation rate.
Why This Methodology Matters: The Iran Case
🇮🇷 Iran, August 2012 — The Gap Between Official and Real Inflation
- Official inflation (Iranian government claim): ~25% per year
- Hanke's estimate using PPP/black-market methodology: ~69.6% per month = 1,030% per year
This discrepancy — a factor of 40 — illustrates why Hanke's methodology matters. When international sanctions collapsed the rial's value on the black market, the government's official CPI measured only basket prices under price controls, masking the true collapse. Hanke's methodology revealed an inflation rate consistent with hyperinflation (>50%/month), making Iran's 2012 episode one of the newly documented cases in the expanded Hanke-Krus Table.
Related Pages
- What Causes Hyperinflation?
- Consequences of Hyperinflation
- Hanke's Solutions to Hyperinflation
- Home: Hyperinflation — Return to the Hyperinflation overview