Venezuela's Inflation Rate Continues To Float Above 6000%
The Grim Reaper has taken his scythe to the Venezuelan bolivar. The death of the bolivar is depicted in the following chart. On the black market (read: free market), a bolivar is worthless, and with its collapse, Venezuela is witnessing today the world’s worst inflation.
On January 29th, Venezuela announced that one of its two official exchange rates was being eliminated. So, now the bolivar “trades” at one rate, under new auction rules. The official rate is now B/USD = 24,968, for those lucky enough to obtain it. But for most, the black market (read: free market) is where bolivar-dollar exchanges take place, and where rate is 236,854 (02/13/2018).
Some have applauded the new system, claiming that it will stabilize the bolivar and eliminate inflation. This, of course, is nothing more than a pipe dream. While the bolivar strengthened a bit and inflation temporarily stabilized after the new system was announced, the bolivar bounce resulted in nothing more than a classic dead cat bounce.
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. With Venezuela’s change in exchange rate system, we have seen inflation slow down. Regardless, today's implied annual inflation rate is 6230%/yr, still the highest in the world (see the chart below).
Authored by Steve H. Hanke of the Johns Hopkins University