Authored by Steve H. Hanke of the Johns Hopkins University. Follow him on Twitter @Steve_Hanke.
The Banco Central de Venezuela (BCV) wins the prize as the world’s worst central bank – at least for the time being. Venezuela’s annual inflation has been in triple-digit territory for more than three years. As the accompanying chart shows, the implied annual inflation rate soared as high as 800% last summer. Since then, inflation has fallen to its current 320% annual rate. This is still well above the phony 180.9% annual rate reported by the BCV in December.
Yes, the BCV’s inflation number is phony. 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 (PPP) theory. When inflation is elevated, it is deadly accurate, and it is the method I use to estimate Venezuela’s inflation rate.
While the triple-digit inflation tragedy coincided with the rise of the late Hugo Chávez and his Bolivarian Revolution, serious inflation problems have plagued Venezuela – courtesy of the BCV – for over 30 years. The accompanying chart makes that clear.