Inflation Is Among The Costs Of Venezuela's War On The Private Sector
Indeed, Belgrade’s Top Cider Mint was working at full capacity, turning out bank notes that were worthless before the ink had dried. Finally, the mint’s physical capacity was reached. The authorities could not print enough cash to keep up. On 6 January 1994, the dinar officially collapsed.
Over the past year few years, Venezuela has been forced to let the central bank’s printing presses roll, though not to the extent they did in Yugoslavia. Nevertheless, the Banco Central de Venezuela (BCV) has turned on the money pumps. In consequence, the bolivar has collapsed and inflation has soared (see the chart below).
As the bolivar collapsed and inflation accelerated, the 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 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 inflation in 2013.
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.
I 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, which previously peaked at 1823% (yr/yr) in early August 2017. At present, Venezuela’s annual inflation rate is 2060%, the highest in the world (see the chart below).
Does this inflation mean that President Maduro will be shown the door tomorrow. No. Milosevic stayed in the saddle for five years after Yugoslavia’s hyperinflation peaked.