Hyperinflation in a Highly Regulated Economy?

One of the dangers we face now in the US is hyperinflation. Government is spending even more than usual, and it appears that the Federal Reserve is printing money with reckless abandon. Flooding an economy with money like this can cause a hyperinflation – where inflation doesn’t just go up to 10% a year but can be as high as 100%, or in some bad situations over 50% per month.

But I wonder about what would happen in our economy, where a lot of prices are regulated. Consider Medicare. A substantial percentage of spending in health care (which is a big component of the economy) goes through Medicare. Medicare’s reimbursement rates are fixed. They may change every year, but likely do not update more frequently than that. If we start experiencing rapid inflation in other areas of the economy, I don’t think Medicare could adjust more than once a year. And they might be dependent on Congress approving any adjustment. Late in the year hospitals and doctors could end up being paid, in real terms, a lot less than they expected at the beginning of the year.

The same thing is generally true for insurance on the consumer end. Rates and coverage are regulated and generally set on an annual basis — homeowners insurance for example. So you work out a deal with your homeowners insurance to pay a certain amount. Your house burns down and now it costs twice as much to repair it because of inflation. So either the insurer pays twice what it expected, or more likely, your insurance no longer covers the full cost of fixing your house because the coverage is not high enough any more.

My world is closely connected to speeding tickets. Those fines and surcharges don’t change very often. So rapid inflation could be good for speeders and others in trouble with the law. Fees like this charged by governments, federal, state and local, all tend to change slowly. So users of government services might get bargains and governments might face real economic challenges.

Another side of this is employees. In many areas, especially government, employees are paid by union contract or some other fixed schedule. Raises occur annually. Union contracts often run for two or even three years. So if we see high inflation, that would be very bad for unionized workers.

In some parts of the economy we have seen price spikes. Gas was much higher before and I suspect it will go up again. Other commodities, like corn and steel, have become very expensive. Many people were complaining about the price of milk. With the current slowdown perhaps that is getting to be less of a problem. But if our economy does recover (hopefully), and in particular if demand comes back, then prices in areas that are not so heavily regulated could shoot up.

I know hyperinflations have been studied and discussed in economics, but I’m not sure if there’s ever been an analysis of how that would play out in an economy with so many highly regulated pricing systems. There’s a project for some intrepid grad student.

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