Venezuela Inflation Q1 2017

Venezuela

Venezuela: Upward price pressures continue in Venezuela

April 6, 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 744.7% 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 spiraling 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 February showed that consumer prices increased 20.8% month-on-month (January: +18.7% mom). In annual terms, inflation spiked from 680% in January to 741% February.

The latest Central Bank data show that the money supply increased by 189.8% in February, up from 175.4% in January and marking the seventh consecutive triple-digit increase. The large increase at the start of the year partly reflects that 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. 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.

Inflation is seen ending 2017 at 724.5%. For 2018, the panel expects inflation of 625.3%.


Author: Jean-Philippe Pourcelot, Economist

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