Goldman Warns Of Venezuela Hyperinflation Threat
Year-over-year inflation in Venezuela accelerated to 35.2% - up from 20.1% YoY in December. Goldman is concerned as the 6.1% MoM (the highest on record) in May means inflation is now endemic and the economy could easily veer from the current stagflation equilibrium into the dangerous and slippery road to hyperinflation. In a sentence that rings all to close to home, they sum up: All in all, we are increasingly concerned with the inflation and monetary dynamics in Venezuela as the classical Sargent and Wallace (1981) “unpleasant monetarist arithmetic” of severe fiscal dominance brought about by growing monetization of fiscal deficits and very weak policy credibility could easily degenerate in a recessionary hyper-inflationary spiral. That must mean it is time to buy the Caracas Stock Index (+72% YTD, +600% since Jan 2012)?
Via Goldman Sachs:
Venezuela: Rising Risks that the Economy Could Shift From Stagflation Toward Hyperinflation
INPC Headline Inflation (May): 6.1% mom vs. Consensus 4.1%
INPC Core Inflation (May): 5.0% mom (36.0% yoy)
Consumer prices rose by a very high 6.1% in May (the highest monthly print on record), driving the yoy measure to 35.2% from 20.1% in December. Food prices rose by 10.0% in May (following the 6.4% increase in April) and are now up 48.1%. Food inflation is a particularly regressive social tax as it disproportionately affects low-income households for whom the weight of food in the overall consumption basket is higher than for the representative consumer.
Eleven of the 13 CPI groups have now inflation running above 20% yoy, which shows Venezuela is now trapped in stagflation (real GDP collapsed to a minor 0.7% yoy during 1Q2013 while annual inflation accelerated by 15pts) and entering the dangerous and slippery road of hyperinflation.
Core INPC inflation printed at an also very high 5.0% in May, driving the yoy measure to 36.0% from 21.4% yoy in December.
Inflation is now endemic and the economy could easily veer from the current stagflation equilibrium onto the dangerous and slippery road to hyperinflation, as money’s velocity of circulation could accelerate very significantly and create negative feedback loops. In fact, at the margin, over the last two months the annualized monthly rate of inflation is already deep into hyperinflation territory (which we define as seasonally adjusted monthly annualized rates of 40%+)
Underlying inflationary pressures are higher than the (in itself very high) official print (36.0% yoy; INPC core) given the presence of still-significant repressed inflation in the system as roughly half of the prices in the CPI are controlled by the government.
The goods scarcity index remains high and very near a record high 20.5% in May, up from the 14.2% 2012 average. Furthermore, the diversity index dropped to 113 in May from 160 in December and 181 a year ago. That is, beyond inflation consumers are also facing rising non-pecuniary costs as they have to allocate increasing amounts of time to search for the desired goods and often have to settle for inferior substitutes. Ultimately, stifling price controls and the significant decline in the supply of dollars to the economy after the October elections are now leading to rising levels of scarcity and declining levels of product diversity.
We expect political uncertainty to remain high in the near term and governability conditions to weaken. This should contribute to keep inflation high as the VEF is likely to continue to weaken further in the non-official market and private investment spending is likely to remain low. In the meantime, the ruling PSUV party's much weaker-than-expected showing at the polls on April 14 may add pressure for additional populist increases in fiscal spending, which are likely to be accommodated by the central bank.
In all, inflation is entrenched at a very high level and is likely to accelerate further in 2013, towards 40% from 20.1% in 2012, given the significant increase in liquidity (M0 growth accelerated to 65% yoy in April and M3 is up 62% yoy) and the yet to finish pass-through from early February's large 32% VEF/USD CADIVI cash rate devaluation. The high inflation environment and fiscal cash-flow crunch are adding pressure for another VEF devaluation.
All in all, we are increasingly concerned with the inflation and monetary dynamics in Venezuela as the classical Sargent and Wallace (1981) “unpleasant monetarist arithmetic” of severe fiscal dominance brought about by growing monetization of fiscal deficits and very weak policy credibility could easily degenerate in a recessionary hyper-inflationary spiral.