Venezuela’s Grim Reaper: Hyperinflation Started on December 17, 2016 and Continues Today, With Annual Inflation Hitting 4304%
The Grim Reaper has taken his scythe to the Venezuelan bolivar. The death of the bolivar is depicted in the following chart. A bolivar is worth less, and with its collapse, Venezuela is witnessing today the world’s worst inflation.
As the bolivar collapsed and inflation accelerated, the Banco Central de Venezuela (BCV) became an unreliable source of inflation data. Indeed, from December 2014 until January 2016, the BCV did not report inflation statistics. Then, the BCV pulled a rabbit out of its hat in January 2016 and reported a phony annual inflation rate for the third quarter of 2015. So, the last official inflation data reported by the BCV is almost two years old. To remedy this problem, the Johns Hopkins – Cato Institute Troubled Currencies Project, which I direct, began to measure Venezuela’s inflation in 2013. We measure the monthly and annual inflation rates on a daily basis. We measure. We do not forecast.
The most important price in an economy is the exchange rate between the local currency and the world’s reserve currency — the U.S. dollar. As long as there is an active black market (read: free market) for currency and the black market data are available, changes in the black market exchange rate can be reliably transformed into accurate estimates of countrywide inflation rates. The economic principle of Purchasing Power Parity (PPP) allows for this transformation.
We compute the implied annual inflation rate on a daily basis by using PPP to translate changes in the VEF/USD exchange rate into an annual inflation rate. The chart below shows the course of that annual rate. Today, a new high of 4304%/yr has been reached (see the chart below).
When it comes to the categorization of an inflation as hyperinflation, we use the following criteria:
- An episode of hyperinflation occurs when the monthly inflation rate exceeds 50%/mo for 30 consecutive days
- The hyperinflation episode ends when the monthly inflation rate falls below 50%/mo, unless the monthly inflation should exceed 50% per month for another 30-day period within a year after the first episode is terminated. In this case, the second episode is not counted as a new hyperinflation episode, and but is instead considered a continuation of the original episode.
In Venezuela, the monthly inflation rate exceeded 50%/mo on November 13, 2016 and remained above 50%/mo until December 14, 2016 (32 consecutive days). On December 15, 2016, the monthly inflation rate fell below 50%/mo. Then, on November 3, 2017, the monthly inflation rate exceeded 50%/mo threshold, and has remained there ever since (for 43 consecutive days). So, Venezuela has been engulfed in a hyperinflation episode since November 3, 2016, with the current monthly inflation rate at 64%/mo (see the chart below).
Authored by Steve H. Hanke of the Johns Hopkins University