Foundations
Rapid inflation
Rapid inflation, especially when it lasts over time, is usually mostly 'nominal' inflation (rather than 'real' inflation), which means that it will mostly affect prices calculated in local currency but not so much prices calculated in a hard currency
What are we talking about?
Rapid inflation is about prices that are changing so fast that they cannot be predicted accurately anymore.
The speed of inflation will have an effect on the level of inflation. While not all high inflation is necessarily rapid, the reverse is generally true: rapid inflation will often turn already high inflation into very high inflation.
Beyond the higher prices, the real effect of rapid inflation is to create uncertainty and unpredictability. It makes it more difficult to decide how much money to spend and when.
Rapid inflation can be temporary or it can last over time. It can happen just sporadically, over a period of just a few weeks or a few months. In such cases, it is usually related to a specific and observable starting point (such as a shock or a specific decision of the government). It can also continue accelerating for longer periods of time, and eventually spiral out of control. In such cases, it usually stems from a loop between inflation and depreciation.
Why do we care?
Because it creates high uncertainty, rapid inflation will have an impact on behaviours, like spending, risk-aversion, and investments. At first, people will try to put their spendings on hold for a while to see what happens (which will affect some salary payments, especially in the public sector, as well as the drawing of new contracts, and the levels of transactions and exchanges in general).
In the short term, it can create some sporadic shortages or temporary shutdowns: shops will decide to postpone re-stocking, some businesses, including public services, will decide to close for a few days to save costs.
If rapid inflation lasts more than a few months, it will eventually start to affect more profoundly the levels of production & employment in general. Inflation that spirals out of control is likely to lead to further economic deterioration with permanent closures for some businesses, massive job layoffs. The lack of public investments and expenditures will also lead to the collapse of many basic services.
Overall, rapid inflation will yield both an increase and a change in needs. It will increase the levels of needs in the overall population, and at the same time it will also significantly increase the severity of needs of the most vulnerable in particular.
Levels of needs: the traditional middle class will often be affected beyond their coping capacities, while poorer populations will gradually become totally dependent on humanitarian assistance. Typically, in periods of rapid inflation, we observe increased competition for essential services (including health, education, safety nets) between 'old' & 'new' beneficiaries, while the aid community tries to scale up its response. Where poor and middle class have different socio-demographic profiles, this has also a significant potential to raise inter-community tensions.
Severity of needs: with housing prices on the rise in particular, most vulnerable segments of population are likely to face an even higher risk of evictions and are typically pushed into cheaper and more remote areas. As a result, they also risk losing access to livelihoods opportunities, often due to increased access and movement constraints. There is also less likelihood that they will have access to mainstream service delivery.
Type of needs: with rapid inflation, the needs will be more multisectoral, with higher variance across locations and households. The type of aid services being demanded in priority will also change: people will increasingly demand tangible and immediate assistance towards basic needs like water, health, and food/cash assistance, at the expense of protection, education and livelihoods programs. At the same time, protection needs will actually increase, especially regarding cases of sexual exploitation and abuse cases among families under financial pressure, rising exploitation of the most vulnerable (e.g. refugee, women headed households, children, migrant workers, etc) driven by competition for scarce resources. Special attention should be paid to new protection risks on labour markets as well as to additional threats from armed groups where relevant.
Beyond programmatic needs, rapid inflation and inflation spirals affect humanitarian operations, especially in terms of salaries, procurement and budgets.
In periods of rapid inflation, you can actually be at first both at risk of underspending and overspending on different budget lines, depending on the currency in which your contracts are set up and when you negotiate them.
Over time, the main problem will become the difficulty to negotiate new contracts with partners and suppliers as they will be reluctant to participate in long tendering processes and commit to price points in advance.
In terms of salaries, national staff in particular is at risk of distortions either with international staff (if not paid in the same currency) or with other locals (if paid in a different currency).
Learn more about measuring and monitoring inflation, comparing MoM and YoY trends, and the difference between 'nominal' and 'real' inflation in our section on the Fundamentals about inflation
How do we monitor it?
Rapid inflation is not determined by a specific rate of inflation (although inflation in the 3-digits is a often a good sign of fast inflation!)
We look at the speed of inflation by measuring Month-on-Month (MoM) inflation rates. We compare them to our predicted trends of inflation for the year to check if inflation is faster than expected.
We also want to monitor the duration and volatility of rapid inflation by comparing MoM inflation over several months in a row to see how unpredictable prices and whether inflation rates change a lot from month to month.
Finally, we want to compare inflation measured in local currency and measured in hard currency (or monitor measures of the passthrough rate between inflation and depreciation) to understand what proportion of the rapid inflation is 'nominal' versus 'real'.