Venezuela: Inflation remains unrestrained in Q2
May 11, 2017
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 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 intensified greatly since the second half of 2016.
FocusEconomics Consensus Forecast panelists estimate that inflation jumped from 702.6% at the end of Q4 2016 to 729.8% at the end of Q1 2017. Large increases in the money supply, a sharp depreciation of the bolivar in the parallel market, the depletion of international reserves 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 March showed that consumer prices increased 16.2% month-on-month (February: +20.1% mom). The institution did not provide annual variation of consumer prices for March but stated that in cumulative terms, consumer prices increased 65.5% in the first quarter of 2017.
The latest Central Bank data show that the money supply increased by 205.8% in March, up from 189.8% in February and marking the eighth consecutive triple-digit increase. Large increases of the money supply at the start of the year partly reflects 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, are indicative of how soaring inflation is eroding personal disposable income and will fan price pressures in the upcoming months.
The rapid depreciation of the bolivar traded in the parallel market from Q4 onwards and the introduction of larger denomination bills in January are indicative of stoking price pressures. 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. 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.