(Bloomberg) — Inflation is back in Venezuela, threatening to undermine the fragile economic recovery orchestrated by President Nicolas Maduro and rekindle a wave of migration that had just begun to subside.
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Prices have climbed at an annual rate of 359% over the past three months, according to an index compiled by Bloomberg. Although this is well below the wildest hyperinflationary highs of recent years – the index hit around 300,000% in 2019 – it is a marked increase from the start of this year.
The price spike reveals an important policy shift by Maduro. After years of containing spending and reducing a bloated budget deficit, the government is once again loosening the purse strings, dishing out cash for everything from holiday bonuses to handouts for Socialist Party loyalists. All this extra liquidity in the economy fuels the fall in the value of the bolivar against the dollar and drives up consumer prices.
“Venezuela is technically out of hyperinflation, but it’s locked into high monthly inflation rates,” said Daniel Cadenas, an economics professor at the Metropolitan University of Caracas. “We will not see less than 100% annualized inflation unless there is a change in economic policy.”
The pain of diminished purchasing power is one of the reasons people are forced to migrate, Cadenas said. More than 7 million people have already left the country in recent years, according to United Nations estimates, and tens of thousands have turned up at the US border this year.
“Venezuela has prices similar to Dubai for products while people receive Sudanese-style salaries. It mainly affects the poor, 93% or the population,” Cadenas said.
By allowing the US dollar to circulate freely, the Maduro administration has spurred an increase in consumer spending which, coupled with a modest increase in oil production, is leading to a surprising economic rebound. Gross domestic product is expected to grow by 6% this year, according to the International Monetary Fund. Although this is the biggest expansion in 15 years, the economy remains a shadow of its former self.
Maduro has framed the takeover as an unlikely comeback for a US-sanctioned country. “A persecuted, tortured, sanctioned, blocked country has found a way by using its own engines to activate the real economy,” he said last week.
Venezuela emerged from hyperinflation in January following a decision by the central bank to increase the supply of dollars in the official foreign exchange market. The strategy produced some results at the start of the year, with monthly inflation moderating in March.
But price increases have accelerated recently. The central bank said consumer prices rose in August – the most recent data available – while the opposition Finance Observatory said annual inflation was close to 157%. Bloomberg’s Cafe con Leche index – based on the price of a cup of coffee in Caracas – puts the figure at 158% last year.
Some economists had forecast annual inflation below 100% in 2022.
The bolivar has weakened by a third over the past three months, to around 9 bolivares to the dollar. An easing of restrictions on government spending has led to a “significant” increase in the local currency supply, which is boosting demand for U.S. dollars, Cadenas said.
Tamara Herrera, director of financial analyst firm Sintesis Financiera, said the trend is likely to worsen as the government makes new year-end payments to public employees, which will boost demand for bolivars. before the Christmas shopping spree.
Government spending has reached 18% of gross domestic product this year, up from around 12% in 2021, Herrera estimates. It predicts that it will increase further to 21% of GDP next year.
The pain of higher prices and the effect of years of migration are being felt in the Chacao market in eastern Caracas, a relatively wealthy enclave in the capital. Sellers are struggling to keep up.
Many customers of Sonia Benavides’ cafe have left the country. Those who stay buy only what they need.
Benavides, 67, plans to use cheaper, lower-quality products to keep prices low. She’s already nearly doubled what she charges for a large latte in the past three months to $1.95. “It’s either good quality or good price, you can’t have both,” she said.
–With the help of Nicolle Yapur.
(Add public expenditure estimates to 14th paragraph)
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