When countries experience hyperinflation, domestic prices of goods and services will rise every minute. In such a situation, no one will 1 I would like to note that the views expressed in this oration are my own as an economist and do not  necessarily reflect the views of the Central Bank of Sri Lanka. I also would like to acknowledge the technical support received in preparing the oration from Dr Chandranath Amarasekara and his team at the Economic Research Department of the Central Bank of Sri Lanka. 1  want to hold the local currency, and people will rush straight from the bank to the shops to buy goods, fearing that their currency holding will lose value along the way. In fact, the banking system itself will collapse. As people lose faith in local currency, the barter system, or the exchange of goods for goods or services will become the norm, making transactions significantly more difficult. Hyperinflation will also cause adverse redistributive effects, destroying real value of middle class savings in local currency and real incomes of fixed income earners such as workers and pensioners. One can read horror stories of hyperinflation in Germany and Australia in the 1920s, and more recently in several Latin American countries and also in countries like Zimbabwe. The episode of hyperinflation in the inter-war Germany is said to have facilitated the rise of Hitler and the global destruction that followed.
High and volatile inflation causes lenders like banks and other financial institutions to demand a higher fixed interest rate on loans to compensate for the risk that inflation will move around, thus raising  2  the cost of finance for investment. At the same time, financial institutions need to offer higher nominal and real interest rates to encourage savers to deposit their money to mitigate the risk of high and volatile inflation eroding the real value of their savings. High and volatile inflation increases the margin between lending rates and deposits, and this high cost of financial intermediation penalises both savers and borrowers. High and volatile inflation encourages workers to bargain for higher wages. High and volatile inflation also prompts producers and sellers in the economy to add higher markups in pricing of goods and services. The combined result of this self-fulfilling cycle will be lower economic growth and higher current account deficits, depleting reserves and volatile exchange rates, and the country will end up with a commercial capitalist class of buyers and sellers of imported goods, or a class of middlemen! Then the question is, what is the appropriate level of low and stable inflation, which will result in more desirable outcomes? Most advanced economies set their inflation target in the low single digits around 2 per cent. For example, the United States and the United Kingdom desire to maintain inflation at around 2 per cent, while in the Eurozone it is below but close to 2 per cent.