Venezuela: Price pressures remain elevated in Q3
September 3, 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. 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 spiraled since the second half of 2016.
FocusEconomics Consensus Forecast panelists estimate that inflation jumped from 757.6% at the end of Q1 to 813.3% at the end of Q2 2017. Substantial increases in the money supply; a sharp depreciation of the currency 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 spiraling inflation.
The opposition-controlled National Assembly started to publish its own index and 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 and has continued to do so ever since the National Assembly was stripped of its powers recently in August. The legislative body has adopted the same methodology for calculating price levels as the Central Bank used previously, and the analysis is conducted by former Bank employees. Data from July showed that consumer prices increased 26% month-on-month (June: +21% month-on-month). In cumulative year-to-date terms, consumer prices spiked from a 176% increase in June to a 249% increase in July.
The latest Central Bank data shows that the money supply increased by 422.6% in July, up from 327.6% in June and marking the twelfth consecutive triple-digit increase. Large increases of the money supply partly reflect various salary hikes and the introduction of larger denomination bills earlier this year. In cumulative terms, the money supply has increased 265.3% through August of this year, far above the 100.0% observed during the same time period in the previous year. The announcement of a 50% salary hike in June, the seventh 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 2016 onwards and the introduction of larger denomination bills in January point to increasing price pressures. The sudden 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. It has been widely documented that consumers are engaging in barter as economic transactions with hard currency have become extremely cumbersome, another indication of the gravity of the country’s economic meltdown.