Inflation in Venezuela

Although I have covered this topic in the past, after yesterday publication of the July result, I think it is worth coming back to it briefly.

The first thing I must rehash is that inflation numbers in Venezuela are meaningless. The Central Bank gathers the data assuming the price control functions. That is, if the government says that sugar costs X, then it costs X until further notice. How does this play in real life? For example, they send an inspector to verify the prices of the said sugar in the state managed food system, Mercal. Two things might happen: 1) there is sugar at the fixed price (check!) 2) there is no sugar (a frequent occurrence these days, for a most crucial staple of the Venezuelan diet!).

Now, one thing the inspector will not likely do is to check to the buhonero (street vendor) stand where there is sugar at probably twice the controlled price. Some might do, some might not and limit themselves to report that effectively the price is as the government has ordered. And this is where price control becomes totally ineffective, and inflation number irrelevant.

The buhonero distribution system is rather important in Venezuela, a truly capitalist tool if ever! Anything that is becoming scarce for any reason ceases to appear in the shelves of Mercal or private supermarkets. Instead it starts appearing in the buhonero stand at a significant mark up. In Venezuela the governments sets controls to nail the opposition in any which way it can (look about the latest Sumate harassment, but more on that later). But the government does not control at all sectors like the buhonero. In fact, it seems that assigning buhonero stands in the streets is a good business for town halls in chavistas hands: buhonero must “pay” for the stands (all without any legal billing of course), they pass contraband merchandise, they sell of sorts of property rights violation merchandise (the pirate market for CD, DVD and programs in Venezuela is astounding! With only once in a blue moon one person stand destroyed by the authorities for show).

In other words the real price of goods in Venezuela is often determined by the buhonero market, the real free market, even wild market, in Venezuela. Neo-liberalism should have it that easy elsewhere in the world! In other words, how can one trust the numbers published by the BCV since this one basically ignores the buhonero parallel system?

Now that we have reviewed this let’s look at the inflation evolution this year. El Universal, delighted to see the government running into trouble even with their own fudged numbers offers us the graph below, taken directly from the BCV!:

The first observation is that in spite of a much ballyhooed -0.4% inflation in February (that nobody serious in Venezuela EVER believed) the trend is to the increase and it seems that it is not over. The goal of a single digit inflation for the year is pretty much shot as we are already at 8% cumulative inflation and there are still 5 months to go. I cannot see how in an electoral year we will get for the next five months a 0.4% average… Even with fudged numbers.

Actually I even wonder how come they could have hoped for such a single digit goal. If there was a trend in lowering the monthly rate, until late 2004, 2005 was clearly a "stable" year as far as monthly rate. Nothing in the Venezuelan economy indicates that inflation can be controlled. In fact we can speculate that inflation is about to start increasing and I, for one, would not be surprised at all if 2006 ends up higher than 2005. Heck, my very own inflation of goods that are not monitored by the BCV is in my rough calculation at least a 20% since January, and going. For example my favorite imported breakfast cereal went up by 40%, fancy bonbons made from Venezuelan cocoa from La Praline or Cacao went up by 20%, restaurants that I use to visit went up by at least 25%.

Thus the BCV inflation represents at best the Mercal inflation, the inflation that the people of lower income brackets are truly experiencing. And this in spite of price controls and heavy subsidies to Mercal and some misiones.

Because this is what the government is not realizing: in its populist electoral binge, subsidies and price controls abound and they kill competitiveness in the private sector. Mercal has chosen to import sugar, to come back to my earlier example. If to this we add that the best sugar lands of Venezuela have been invaded and destroyed in Yaracuy and that the national production of sugar is falling, how can anyone expect that sugar price will remain the same (remaining producers are asking for a 40% price increase!). Thus, when this electoral carnival is over instead of several producers for sugar, chicken, milk, etc…the government will be left with scarcely a few, which will monopolize all, creating the worst capitalist nightmare! The temptation will be to nationalize again some of these industries and then we will all meet at the food lines, ration cards in hand.

That is what happens when silly revolutions want to reinvent the wheel. And when you give them cheap money in abundance, it is like "mono con hojilla" (monkey with a blade) the long term damage to the economy can be terrible!