Despite some of the more excitable oppo commentary out there, there are good reasons to doubt whether yesterday’s devaluation is really likely to cause much of an inflation spike. While, in a normal country, a devaluation certainly does presage inflation, Venezuela is far from a normal country.
Rather than a single exchange rate, we’ve long had two: the Narnia Exchange Rate – which is very nice indeed, but basically a fairy tale as far as most of the economy was concerned – and the Voldemort Exchange Rate – unpredictable, unmentionable, dangerous, and actually setting prices throughout most of the economy.
What happened yesterday affected only the Narnia Exchange Rate. While it broke some of that mythical rate’s enchantment, the fact is that policy decisions that touch only the exchange rate of the land of dragons, dwarves and talking lions has a limited impact on the economy the rest of us live on. Moreover, the measure’s impact on the Voldemort Exchange Rate, the real exchange rate, is much more ambiguous. Easing the pressure for Narnia Dollars should, in principle, ease the pressure for Voldemort dollars, which could end up negating much of the alleged inflationary impact.
So the usual devaluation=higher prices reflex may or may not apply here. What certainly is inflationary is the US$7 billion foreign reserves shakedown. But then, too many pixels have been spilled on that beat already.