Venezuela Inflation Q4 2016


Venezuela: Inflation estimated to have soared past 500% at end 2016

January 5, 2017

Given the dearth of official data for inflation in Venezuela, different indicators from official and non-official sources are used as proxies to measure the evolution of price levels. Developments throughout 2016 suggest that the inflationary spiral has intensified 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 intensified greatly in Q4 2016 as the bolivar depreciated sharply.

FocusEconomics Consensus Forecast panelists estimate that inflation jumped from 470.2% at the end of Q3 to 576.9% at the end of Q4. Large increases in the money supply, an ongoing devaluation of the bolivar and depletion of international reserves are among the main reasons behind Venezuela’s spiraling inflation.

According to the Central Bank, the money supply increased by 144.6% in November, up from 126.6% in October. In the January to November period, the money supply increased 108.4%. November’s increase in the money supply reflects in part a 40% hike in minimum wages and a reduction in the Central Bank reserve requirements. A 50% salary hike announced in January 2017 is a reflection of soaring inflation, as inflation exceeds salary growth. In turn, international reserves at the end of December stood at a multi-year low of USD 11.0 billion. Low levels of international reserves are putting pressure on the currency as the Central Bank has fewer assets to support its ever-growing money supply.

The rapid devaluation of the bolivar traded in the parallel market from Q4 onwards is indicative of stoking price pressures. In Q4, the bolivar traded at the parallel market shed 65.9% of its value. The sudden and sharp depreciation reflects a collapse in demand for the currency as economic agents try to exchange the depreciating currency for other currencies or assets before the bolivars they hold continue to depreciate. The sharp depreciation of the currency in the last few months suggest that price pressures are increasing and some analysts are warning of a potential hyperinflationary cycle in the South American country.

According to figures from the Venezuelan Center of Documentation and Analysis for Workers (Centro de Documentación y Análisis para los Trabajadores, CENDA), the basic basket of food, goods and services was 14.3% more expensive in November compared to October and 666% higher than in the same month in 2015. The basic basket of food, goods and services takes into consideration prices of a different set of products than the consumer price index; particularly, the basic basket tracks prices of selected products to cover basic food needs, personal hygiene, living expenses, healthcare, education, clothing and footwear.

Inflation is seen ending 2017 at 747.4%. For 2018, the panel expects inflation to rise and reach 600.2%.

Author: Jean-Philippe Pourcelot, Economist

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