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  HOME | Venezuela (Click here for more Venezuela news)

Money Printing, Production Plunge Cause Hyperinflation in Venezuela

CARACAS – The uncontrolled printing of base money and a dramatic decline in production in recent years have led Venezuela down the road to hyperinflation, which became a reality this week when consumer prices rose more than 50 percent in October relative to the previous month.

“The government, to cover its expenses, what it does is create base money,” economist Henkel Garcia told EFE.

Garcia is the director of Econometrica, a prestigious economic consultancy that calculated that October’s consumer price index rose 50.6 percent from September.

Along with the opposition-controlled legislature (the National Assembly) and some other private companies, Econometrica has been one of the sources for Venezuela’s CPI since 2015, when the Central Bank stopped publishing official inflation figures and other economic data.

“The monetary base is growing annually in Venezuela by more than 1,000 percent,” said Garcia, who noted that the government was printing money to cover a large budget deficit.

The Fedecamaras business federation, for its part, said the South American country’s economy had witnessed the shuttering in recent years of more than half of the 12,000 businesses that once were in operation.

“If we measure the supply of goods per capita, taking into account both what is locally produced and what’s imported, Venezuelans today have half of the products we had four or five years ago,” Garcia said, referring to another textbook cause of hyperinflation.

This imbalance between the abundance of nominal money and the lack of goods and services in the marketplace triggers a drop in the real value of the bolivar and the purchasing power of citizens, who due to their expectations of higher inflation rates in the future avoid saving in the national currency and rush to spend the money they currently have.

“There’s a rotation or a velocity of money much greater than in previous years,” Garcia said of this phenomenon.

According to the most recent study by the opposition think tank Center for Documentation and Analysis for Workers (CENDA), a Venezuelan needs almost half of his or her minimum salary to cover an average household’s basic needs for a single day, a situation that appears likely to worsen as the inflation problem grows more severe.

The 11 products of the basic food basket rose all in price in September while some skyrocketed, including sugar (up 98.5 percent), non-alcoholic beverages (up 87.4 percent), fish (up 51.6 percent), milk, cheese and eggs (up 47.9 percent) and fats and oils (up 40.5 percent).

To compensate for that explosion in prices, President Nicolas Maduro’s leftist government and that of his mentor and predecessor Hugo Chavez, who died in 2013, have ordered more than 40 minimum-wage increases since 1999.

Maduro decreed the most recent one – the fifth of 2017 – this week, raising Venezuela’s minimum wage by 30 percent.

“Minimum wage against inflation: one goes up the stairs and the other up the elevator,” macroeconomic analysis firm Ecoanalitica says.

According to figures from that firm, the minimum wage has climbed 555 percent year-to-date but consumer prices have risen 1,115 percent.

 

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