Zimbabwe's inflation will rocket to 1.5m% before the end of the year, the US ambassador to Harare predicted yesterday, forecasting massive disruption and instability that will drive President Robert Mugabe from office.

In a telephone interview with the Guardian, Christopher Dell said prices were going up twice a day, sapping popular confidence in a government which is now "committing regime change on itself".

"I believe inflation will hit 1.5m% by the end of 2007, if not before," Mr Dell said. "I know that sounds stratospheric but, looking at the way things are going, I believe it is a modest forecast."

Zimbabwe's official inflation is 4,500% but independent economists and retailers say it is really above 11,000% and picking up speed. The black market rate for the Zimbabwean dollar has slumped, from Z$160,000 to the pound last week to more than Z$400,000. It collapsed further yesterday, tumbling to more than Z$300,000 to the dollar. The official rate is fixed at just Z$250. Mr Mugabe insists that the Zimbabwe currency must not be devalued.

"Prices are going up twice a day, in some cases doubling several times a week," said Mr Dell, who is approaching the end of his posting to Zimbabwe. "It destabilises everything. People have completely lost faith in the currency and that means they have lost faith in the government that issues it.

"By carrying out disastrous economic policies, the Mugabe government is committing regime change upon itself," he said. "Things have reached a critical point. I believe the excitement will come in a matter of months, if not weeks. The Mugabe government is reaching end game, it is running out of options."

Hyperinflation is spreading poverty, as even basic goods become unaffordable. Supermarket trollies lie idle as few can afford to buy more than a handful of goods. Government regulations only permit the withdrawals from banks of Z$1.5m a day, which is not enough to buy a week's worth of groceries.

Golfers pay for drinks before they set off on their round, because the price will have gone up by the time they have finished the 18th hole. One Zimbabwean was recently told by a pension company that it would no longer send him statements as his fund was worth less than the price of a stamp.

"I can barely cope with inflation in the thousands, but millions? We will die," said Iddah Mandaza, a Harare factory worker, who added that some workers were now saving on transport costs by "going to their jobs on Monday and sleeping at the workplace until Friday. They all share their meals. That's what they do to get by."

Many Zimbabweans are resorting to bartering. "I traded some soap for two buckets of maize meal [Zimbabwe's staple food]. It was far much better than trying to buy it in the shops," said worker Richard Mukondo. "People in the rural areas are even worse off. You can see they are hungry and their clothes are in tatters. They trade in whatever they can produce: tomatoes, onions, chickens and eggs."

Tony Hawkins, professor of economics at the University of Zimbabwe, said that no one held cash in the country any more. "People spend it as soon as they get it. Goods hold their value, not money. The government has run out of solutions. At this rate perhaps inflation could hit 1m%, but one gets a sense that things will crack before then."

Enterprising Zimbabweans abroad have set up internet trading schemes, such as Mukuru.com, in which Zimbabweans overseas pay for goods with foreign currency and then vouchers for fuel, food and medicines are sent to recipients in Zimbabwe via email or on their mobile phones.

This business has thrived because more than three million Zimbabweans - a quarter of the people - now live abroad. Half of Zimbabwe's families depend on remittances from overseas to pay basic monthly bills, according to a recent survey by the University of Zimbabwe.

Mr Dell, 51, who has had a tumultuous three years as ambassador to Zimbabwe, said that Mr Mugabe faced further trouble from his army, which used to be considered solidly loyal to the president. Last week six men, including an army private and a retired senior officer, were charged in court with plotting against the president. He said the allegations of the coup plot show divisions within Mr Mugabe's ruling party, Zanu-PF.

"I don't believe it was a real coup plot. I think it shows one side of Zanu-PF plotting against the other. The bitter factional infighting is now dragging in the military. That cannot be good news for Mugabe," said Mr Dell. South African president Thabo Mbeki's efforts to mediate between Zanu-PF and the opposition Movement for Democratic Change are "the last great hope for a peaceful resolution to Zimbabwe's crisis", said Mr Dell.

The dash from cash

It is a shopper's nightmare and an economist's dream, often producing surreal economic behaviour. When prices rise every day, people ditch cash in favour of assets (precious metals, property or even pianos in Weimar Germany) that retain value. Foreign currency may become de facto tender, as in Russia (dollars) and the former Yugoslavia (marks) in the 1990s. Workers spend salaries as soon as they are paid. Savings fall as bank deposits and pensions become worthless; bartering takes over and the state prints more zeroes on money. Germany had a 100 trillion Reichsmark note in 1923 while a postwar Hungarian note had 20 noughts. Hyperinflation has made victims of politicians too, from interwar Germany to Boris Yeltsin's Russia and most recentlyArgentina, which got through four presidents in four months in 2001-02.