3 Lessons From Hyperinflationary Periods: Abstract

Table of Links

• Abstract

  1. Reduce the company’s costs of changing prices (“menu cost”)
  2. Reduce customers’ “stress of uncertainty”
  3. Reduce societal fears of “shrinkflation, greedflation, and doubtflation"

• References

Abstract

Inflation is painful, for firms, customers, employees, and society. But careful study of periods of hyperinflation point to ways that firms can adapt. In particular, companies need to think about how to change prices regularly and cheaply — because constant price changes can ultimately be very, very expensive. And they should consider how to communicate those price changes to customers. Providing clarity and predictability can increase consumer trust and help firms in the long run.

JEL Classification: E31, L16, M30

Keywords: Inflation, Hyperinflation, Pricing, Price Setting, Price Adjustment, Menu Cost, Cost of Price Adjustment, Implicit Contract, Long-Term Relationship

Introduction

As inflation soars to its highest rates in 40 years, it’s critical that businesses have a strategy to respond to fluctuating costs and prices. Pricing during today’s inflation is particularly challenging because people are exhausted and emotionally fatigued from dealing with extreme uncertainty created by the ongoing pandemic, the war in Ukraine, and fears of recession.

These stressors affect the fabric of markets and society—amplifying frustration with companies and the overall economy. There are strategies that companies can use to earn consumers’ trust during inflation. We have documented these strategies by studying periods of runaway inflation. For example, in Israel during the early 1980s inflation rates rose to over 100% for multiple years, climbing to 430% in 1985 (Snir, Chen, and Levy, 2021). At its extreme, this is known as hyperinflation (inflation of 50% or more per month). The worst hyperinflationary episode in modern history was experienced by Hungary in July 1946, where the inflation rate was 41.9 quadrillion percent, causing prices to double every 15.6 hours (Hanke and Krus, 2013). We’ve studied how businesses responded to several of these periods, with a particular focus on Israel.

Three major lessons from hyperinflationary periods can help managers, consumers, and societies better cope with and more successfully navigate their current inflationary challenges. Together, they can help companies thrive and lessen the burden that inflation places on consumers as well.