Venezuela's Hyperinflation Hits 80,000% Per Year In 2018

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Venezuela's economy has collapsed. This is the result of years of socialism, incompetence, and corruption, among other things. An important element that mirrors the economy's collapse is Venezuela's currency, the bolivar. It is not trustworthy. Venezuela's exchange rate regime provides no discipline. It only produces instability, poverty, and the world’s highest inflation rate for 2018.  Indeed, Venezuela’s annual inflation rate at the end of 2018 was 80,000%.

I observed much of Venezuela’s economic dysfunction first-hand during the 1995-96 period when I acted as President Rafael Caldera’s adviser. But it wasn’t until 1999 when Hugo Chavez was installed as president, that the socialist seeds of Venezuela’s current meltdown started to be planted. This is not to say that Venezuela had not suffered from an unstable currency and elevated inflation rates before the arrival of President Chavez, but with his ascendancy, fiscal and monetary discipline further deteriorated and inflation ratcheted up. By the time President Nicolas Maduro arrived in early 2013, annual inflation was in triple digits and rising. Venezuela entered what has become a death spiral.

With the acceleration of inflation, the Banco Central de Venezuela (BCV) became an unreliable source of inflation data. Indeed, in December 2014, the BCV stopped reporting inflation statistics on a regular basis. To remedy this problem, the Johns Hopkins-Cato Institute Troubled Currencies Project, which I  direct, began to measure Venezuela’s inflation back to 2013.

So, how do we accurately measure Venezuela’s inflation? There is only one reliable way. The most important price in an economy is the exchange rate between the local currency - in this case, the bolivar - 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 data are available, changes in the black-market exchange rate can be reliably transformed into accurate measurements of countrywide inflation rates. The economic principle of purchasing power parity (PPP) allows for this transformation. And the application of PPP to measure elevated inflation rates is rather simple.

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