Inflation in Venezuela

Venezuela - Inflation (end of period)

Inflation spiral continues in Q2

Given the dearth of official data for inflation, different indicators from official and non-official sources are used as proxies to measure the evolution of price levels in the South American country. Developments throughout 2016 and 2017 suggest that the inflationary spiral has intensified enormously since the latest official inflation data from December 2015 showed that prices had grown by 180.9% annually. In particular, price pressures seem to have spiralled since the second half of 2016.

FocusEconomics Consensus Forecast panelists estimate that inflation jumped from 704.7% at the end of Q4 2016 to 746.5% at the end of Q1 2017. Large increases in the money supply, a sharp depreciation of the bolivar in the parallel market and the dysfunctional price control scheme in the country, which has caused acute shortages of consumer goods in the economy, are among the main reasons behind Venezuela’s spiralling inflation.

The opposition-controlled National Assembly started to publish their own inflation data in February as the government remains quiet on the matter. The index aims to provide reliable data on the evolution of price levels in the country. The legislative body has adopted the same methodology for calculating price levels as the Central Bank used to do and the analysis is conducted by former Bank employees. Data from April showed that consumer prices increased 16.5% month-on-month (March: +16.2% mom). In cumulative year-to-date terms, consumer prices spiked from a 65.5% increase in March to 92.8% in April.

The latest Central Bank data show that the money supply increased by 231.4% in April, up from 205.8% in March and marking the ninth consecutive triple-digit increase. Large increases of the money supply at the start of the year partly reflect a salary hike in January and the introduction of larger denomination bills. The announcement of a 60% salary hike in May, the sixth since the start of 2016, is indicative of how soaring inflation is eroding personal disposable income.

The rapid depreciation of the bolivar traded in the parallel market from Q4 onwards and the introduction of larger denomination bills in January point to stoking price pressures. The sudden and sharp depreciation reflects a collapse in demand for the currency as economic agents try to exchange it for other currencies or assets before the bolivars they hold continue to depreciate. There are numerous reports that consumers have engaged in barter as economic transactions with hard currency have become extremely cumbersome, in another indication of the seriousness of the country’s economic meltdown.

Inflation is seen ending 2017 at 896.7%. For 2018, the panel expects inflation of 835.3%.