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

Beyond the theory of PPP, the intuition of why PPP represents the ‘gold standard’ for measuring inflation during hyperinflation episodes is clear. All items in an economy that is hyperinflating are either priced in a stable foreign currency (the U.S. dollar) or a local currency (the bolivar). If goods are priced in terms of bolivars, those prices are determined by referring to the dollar prices of goods and then converting them to local bolivar prices after checking with the spot black-market exchange rate. Indeed, when the price level is increasing rapidly and erratically on a day-by-day, hour-by-hour, or even minute-by-minute basis, exchange rate quotations are the only source of information on how fast inflation is actually proceeding. That is why PPP holds, and why we can use high-frequency (daily) data to calculate Venezuela’s inflation rate, even during episodes of hyperinflation.

And what criteria are used to categorize an inflation as an episode of hyperinflation? The following criteria should be met before any episode of elevated inflation be termed “hyperinflation”:

  • An episode of hyperinflation occurs when the monthly inflation rate exceeds 50%/mo. for 30 consecutive days
  • The hyperinflation episode ends when the monthly inflation rate falls below 50%/mo. mark, unless the monthly inflation should exceed 50% per month for another 30-day period within a year after the first episode is terminated. In this case, the second episode is not counted as a new hyperinflation episode, and but is instead considered a continuation of the original episode.

In Venezuela, the monthly inflation rate exceeded 50%/mo back on November 13, 2016, and remained above 50%/mo until December 14, 2016 (32 consecutive days). On December 15, 2016, the monthly inflation rate fell below 50%/mo mark. Then, on November 3, 2017, the monthly inflation rate again exceeded 50%/mo threshold, before falling below the threshold on December 17, 2017 (for 44 consecutive days). So, Venezuela has been engulfed in a hyperinflation episode ever since November 13, 2016, with another flare-up of the same episode occurring during the November-December 2017 period.

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