Authored by Steve H. Hanke of The Johns Hopkins University. Follow him on Twitter @Steve_Hanke.
On Thursday, Venezuela’s central bank released a long-overdue -- and little-trusted -- report claiming that the country’s inflation rate in 2015 was 180.9%. Unfortunately, for the global community, as high as this figure sounds, it is way below the true inflation rate.
Through a confluence of incompetence and widespread corruption, the Banco Central de Venezuela (BCV) has shown time and time again that it can’t be trusted. Bogus inflation statistics are nothing new.
The only reliable method for calculating inflation in countries where the rates are elevated, like Venezuela, is to observe changes in the black market (read: free market) exchange-rate data. These changes can then be translated into implied inflation rates. It’s nothing more than an application of standard purchasing power parity (PPP) theory. When inflation is elevated, it is deadly accurate. Using the PPP approach, I have calculated that Venezuela’s 2015 inflation rate was 384.7% - a far cry from the 180.9% that the government reported on Thursday.
As the accompanying chart indicates, the Banco Central de Venezuela has vastly underestimated inflation for 2015. Most of the investment banks' guestimates aren’t much better. Like most big inflations, Venezuela’s will end in tears.