Venezuela's Grim Reaper: A Current Inflation Measurement, Including a Note on the IMF's Musings on Inflation

Steve H. Hanke's picture

Authored by Steve H. Hanke of the Johns Hopkins University. Follow him on Twitter @Steve_Hanke.

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 worthless, and with its collapse, Venezuela is witnessing 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. 

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 last peaked at 2662% (yr/yr) in the beginning of October 2017. At present, Venezuela’s annual inflation rate is 2712%, the highest in the world (see the chart below). 

Most musing about Venezuela’s inflation are just that – musings, finger-in-the-wind FORECASTS. The IMF October 2017 Economic Outlook contains the IMF’s FORECAST for 2018. The IMF’s FORECAST for inflation is 2300%. This musing is way off the mark. Annual Inflation today is MEASURED at 2712%, which is well above the IMF FORECAST for 2018. I do not report FORECASTS, but real MEASUREMENTS.