Venezuela: Signs of hyperinflation looming
February 10, 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 in the second half of 2016.
FocusEconomics Consensus Forecast panelists estimate that inflation jumped from 530.3% at the end of Q3 2016 to 632.7% at the end of the year. Large increases in the money supply, a sharp weakening of the bolivar in the parallel market, the depletion of international reserves and the dysfunctional price control scheme in the country are among the main reasons behind Venezuela’s spiraling inflation.
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 16.0% more expensive in December compared to November. 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. According to CENDA’s analysis, 16 minimum wages are needed to buy the basic basket of goods and services in December.
The latest Central Bank data show that the money supply increased by 159.2% in December, up from 144.6% in November and marking the fifth consecutive triple-digit increase. The money supply is expected to have increased sharply in January thanks to a 50% salary hike, the fifth since the start of 2016, and the introduction of larger denomination bills.
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. In Q4, the bolivar traded in 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. Panelists are becoming increasingly concerned of a hyperinflationary cycle in the country, among them JP Morgan who considers such a scenario to be very real:
“[Average] inflation could approach 1,000% by mid-2017 before we tentatively pencil in a retreat. The call that Venezuela will not slip into a hyperinflationary spiral is based tenuously on a view that eventual FX regime correction will short-circuit the vicious circle of CB monetization of PDVSA’s deficit.”The likelihood of policy change is very slim since the latest cabinet reshuffle at the start of the year consolidated hardline chavistas at the helm of key economic ministries. The latest reshuffle included the replacement of the Central Bank governor by another dogmatic chavista, suggesting policy continuation in the short- and middle-term.