If it's not on the shelves, it's not in the inflation numbers

Maduro's plan to win the war on inflation...
Maduro’s plan to win the war on inflation…

Steve Hanke’s recent post arguing Venezuela is already in a hyper-inflationary spiral strikes me as wrong in a strange, evanescent kind of way. Even as Hanke accepts the standard definition of hyperinflation as prices rising at more than 50% per month, he argues that Venezuela is already nearly there – basically because of how fast the Voldemort dollar has been rising this year.

It’s a weird understanding of hyperinflation, and of the role of the parallel market. For one thing, using the black-market dollar as some sort of objective measure of the real underlying equilibrium exchange rate is seriously problematic. That market is seriously distorted, extremely opaque and – lest we forget – illegal. By definition, the Voldemort dollar rate includes an unknowable (but probably large and imaginably growing) illegality premium. Using that price as your marker for implied inflation strikes me as fanciful, for the same reason that it’s fanciful to think that if cocaine were legalized, current street prices in the illegal market would just carry on after legalization.

There’s one sense in which Hanke is sort of right, though. The only reason prices aren’t rising much faster than they are in Venezuela these days is that the government has decided bare shelves are a suitable substitute for faster rising prices. But here the conundrum only deepens.

Without the elaborate price control raj Chávez pioneered and Maduro has been “perfecting,” prices would likely be going up much faster. A toaster that cost 10 last month would cost 15 this month. But under the control regime, a toaster that cost 10 last month is price-controlled at 11 this month.

Trouble is, no sane trader is willing to sell it to me for 11 – among other things, cuz his costs just jumped to 13. And so the government’s policy stance turns up in my life in the form of empty shelves where the toasters should be.

The question then becomes, what’s the impact of that empty shelf on the inflation figures?

Here we’re almost outside the realm of economics and entering that of philosophy. I imagine the BCV books toaster prices as having risen 10%, but for me, the consumer, toaster inflation is no longer really capturable in percentages. My reality is that I can’t find a toaster at any price.

At this point, I have to either pay an illegality premium to buy it in the black market, or I can pay a different premium in the form of time wasted standing in line when I hear a rumor that such-and-such Bicentenario just got a shipment of toasters in. The reality is that there isn’t any evident way to render these realities into neat inflation percentages.

I imagine Hanke would argue that his method of putting a percentage figure to the inflation that doesn’t get recorded because it’s been displaced by an empty shelf is neither more nor less arbitrary than any other, and has at least the virtue of being grounded in an actual price indicator, however flawed. I guess that’s a defensible point. But it still seems to misstate something important about the kind of macro chaos we’re facing.

High as inflation is, what’s really pissing people off isn’t that prices are rising out of control, but that key things on their shopping lists aren’t on offer at all. Hanke’s is a funny kind of hyperinflation: sort of like trying to measure the extent of gangrene that would’ve developed on a limb you’ve already amputated to prevent gangrene.

[Hat tip: DTC]

Caracas Chronicles is 100% reader-supported. Support independent Venezuelan journalism by making a donation.


  1. I don’t know what is worst; to have real hyperinflation or Venezuela’s case of chronic double-digit inflation. Hyperinflation would eventually force the country into dollarization, the only long term solution to the inflation problem in a country with weak (non-existent) economic institutions.

  2. The analysis of Venezuela’s economy with regular economic concepts is becoming more impossible every day because the economy that you know is being replaced in front of your eyes.
    If Nicolas stays in power Venezuela is going to go into a barter economy, the “comunas” are a precursor of that.
    That is by design of the government and it is by design because a chicken could be used to trade for rice but not to finance the opposition.
    These people are perverse; the only thing they care about is staying in power.

  3. I’m not going to defend what Hanke’s methodology because I haven’t even looked at it. However, for what I understand of your post, what I’m going to argue now might be in Hanke’s favor. First, your illegal/distorted market argument about the black market exchange rate doesn’t make much sense. The reason is simple and can be illustrated by the following example. Suppose that the distortion is that the (relevant) exchange rate is kept constant way below its “equilibrium” value. As a result prices of imported goods raise much less than domestic goods, and inflation is much lower than it would be otherwise. Using your words: “It’s a strange understanding of [inflation…] For one thing, taking the [heavily undervalued] dollar as some sort of objective measure of the real underlying equilibrium exchange rate is seriously problematic because that market that is seriously distorted, extremely opaque…” However, there’s nothing wrong with that inflation rate in the sense that it’s indeed the observed increase in the aggregate price level.

    The problem with the current situation where price controls and massively undervalued official exchange rate is, as you very well pointed out, SCARCITY. When the BCV goes to the market and can’t find certain goods, it has somehow to impute a value to that good in order to calculate the IPC. I really have no idea what they really do. Do they just assume that the price is the same as last period if they can’t find that product on the market? That seems just wrong. In my opinion, a more sensible imputation would take into account the rising cost of producing or importing that good. For the latter, you would have to assume that the importer could not find undervalued official greenbacks and, as a result, she would have to go to the black market. In this case, it makes a lot of sense to take the skyrocketing black-market rate to impute the price of that imported good we can’t find, regardless of how crazy and distorted that exchange rate might be. If that’s what Hanke’s methodology does, I have no problem with it.

      • It could very well be an overstatement. Figuring out the right and relevant inflation rate is tricky under current circumstances. Let me just point out that there is a difference between long-run inflation and short-run inflation. There is clearly a tight relationship between money growth and inflation in the longer run. In the short run, that might not be the case. The whole New Keynesian macro school is based on that premise. However, typically you would see that in the short run inflation is *below* the money growth rate! One way to explain a higher inflation rate than the money growth rate is precisely by looking at the parallel exchange rate. In the current Venezuelan forex market, there’s no tight correlation between liquidity and exchange rate because there are funny things happening on the supply side of the market as well. Moreover, you have risk premium soaring and other market anomalies playing a bigger role in this market under the current conditions. So, it’s not unthinkable to have a much higher inflation rate than liquidity growth.

        • Also, hyperinflation episodes are typically accompanied by a collapse in money demand. In such cases, inflation should actually be above money growth so that real balances shrink as desired by the public. I am not making a point in favor of Hanke oversimplistic aproach here, but I am saying that if we really were at the beggining of a hyperinflation spiral, that is exactly what we would see (prices going up faster than money rate of growth)

    • Newbie question, here.

      Where are those prices taken from, supermarket chains? If that’s the case, I wager that if inflation rate were calculated using street vendor prices instead of supermarket chain prices (BsF 300 for 1 Kg of powdered milk, for example), those numbers would be quite higher.

      People in slums often buy in local grocers where nothing is sold at regulated prices. People with kids buy milk at whatever price they find, etc. Outside main cities (think Tinaquillo) grocers (mostly chinese or arab owned) never have regulated items. People go to street vendors.

      • Navarro,

        Lots of poor people from such cities (cities, not villages) as Tinaquillo, El Tocuyo, Mariara etc, i.e. where over 50% of Venezuela’s population lives, do a lot of their shopping in Mercales. They spend hours queuing up but they have the time for that.
        They also go to the Chinese, the Arab, but only after having visited the first places.

        • Of course, stats are hard to get.
          I know this because people everywhere there (friends and relatives) tell me…either their neighbours or, less likely, my contacts, go there.
          Look at twitter: #maturin Más de 2 millones de familias han adquirido productos Mercal este año en Monagas http://ow.ly/2BAqzu

          Monagas has about 1 million people, so if what they are saying is not rubbish (1% of probability it is not), we could interpret this like “each family went twice on average” or people from other places went to Monagas or the average family size is half a person.

          Reality would be: most people still voting for Chavismo who are not high ranking officials or contractors do go to Mercal at least a couple of times a month.

        • Well some people go to Mercal, but most white collar workers can’t because of their work schedule. Also, Mercal is not what it used to be. Most of the times several staples are missing (pasta, rice, corn meal, milk, toilet paper), though meat and chicken are more ubicous these days. They are also missing from supermarkets and formal grocers. So people end up going to street vendors more often than not and those prices are capitalismo salvaje.

          Remember that the government is emphasizing distribution to major cities through SADA, since that agency regulates where all national shipments go. They are the ones who determine how much of each item each region gets, and give the according codes to the truckers. If the National Guard stop one of these truck and the code doesn’t match the route, they intervene.

    • RE: Do they just assume that the price is the same as last period if they can’t find that product on the market?

      Yes, they impute the very same price the product had the LAST time it could be found in the shelves (!!!), go figure

  4. Good comment by Manuel.

    Quico, I think you’re overestimating the ability to keep inflation low by forcing shelves to be empty. Zimbabwe had *both* empty shelves and soaring monthly inflation rates. I don’t know how the Central Bank of Zimbabwe actually estimated inflation back then. Perhaps in one of those treaties Chávez signed with Mugabe there is space for learning from them how to operate in a hyper-inflationary environment.

    By the way, empty shelves are definitely the standard policy prescription of the Maduro era. Call it “¡Vacíen los anaqueles!” economics.

    • Well, but it’s different. Mugabe was monetizing at a rate that’s a far cry from what we’ve seen here. What Hanke is arguing is that prices are growing at 10 times the speed that liquidity is growing. That can’t be right…

      • “What Hanke is arguing is that prices are growing at 10 times the speed that liquidity is growing. That can’t be right…”

        Well, if you posit that an empty dairy aisle means that the price of milk is infinity….

  5. Not a single Venezuelan in my extended political family rises to defend the right of the Venezuelan store owners to sell plasma TVs at whatever price they wish. They all, without exception, feel pleased that the government is bankrupting “the thieving store owners.” Having lived in Caracas for almost ten years, I still cannot understand how the Venezuelan middle classes keeps cutting off their nose to spite their face, first by voting for Chavez to “punish the government” (even though the danger posed by Chavez was evident even then) and now this spiteful self gratification, once again. They don´t learn.

    • I was watching the video about the Daka plundering in Valencia. I was looking at their cars, trying to catch some words here and there. Most of those plunderers didn’t seem like from classes D and definitely not E. There were quite a few middle class, some probably C+ or even B (no idea how people really measure those classes in Venezuela and how stable they can be in these circumstances, but anyway, you get the idea).

      • Kepler most of the people lining up in DAKA are revendedores who make a living out of arbitrage because of the control exchange. Many people, with college degrees, have turned to these types of businesses to make a living. Paying to buy someone´s Cadivi cupo for a fee. Buying cars through graft in a dealership and sell them to make a profit. I mean, who, but someone dedicated to profiting from arbitrage, has the time and the money to be in a line for 2 days missing work to buy 5 tvs?

    • I don’t remember who tweeted that Venezuelan only defend their own private property. Anyone will say “bueno pero es verdad que esos bichos son unos especuladores” at the same time they sell you the dollars they got from CADIVI for 6,30 at 60 or their apartment value calculated at 60 without a hint of irony.

    • The problem is very clear in the government eyes: We’re subsidizing the dollars for you to import this … TV, fridge, toaster, etc. therefore you are stealing from the “people” by eating on the subsidy as “profit”. After all, all dollars come from PDVSA and PDVSA es del pueblo!

      Solution: Stop subsidizing the dollar, or stop expecting that by subsidizing the dollar you are subsidizing the whole economy.

  6. If you can’t find the product, doesn’t it make sense to assume it’s price is infinite (or much much higher than the label)? Since no amount of government issued paper will do the trick. Maybe another method would be to assume the cost of transporting yourself to where you can find it, what is the cheapest ticket to another country? aren’t those prices also increasing at more than 50% per month, maybe take a bus ride to Cucuta?

  7. “…I can pay a different premium in the form of time wasted standing in line”. This is, for me, hugely significant. People who cannot pay other people to do these things spend so much of their lives focussed on where to find things, and then standing in line getting them. Human life expectancy, taking away time lost on looking for basic necessities, drops and drops. The regime does not give a crap about people standing in line because it does not understand the value of productive work, or productive play, that otherwise could be going on during those periods of line-standing. In other words, it does not understand the value of human life for regular people. That litre of milk is priceless in this dysfunctional economy.

  8. Increase in prices and inflation are two completely different things.

    As an example, a drought could cause the price of wheat to go up, causing a sharp increase in the price of bread. That price increase can be completely independent of inflation. In another example, global political circumstances can cause the price of oil to rise, and in turn cause a general rise in the price of nearly everything, still completely independent of inflation.

    Inflation is a concept limited to the devaluation of a currency through printing of excess currency, or other manners of injecting excess liquidity into the monetary system. Only in the absence of outside factors and government meddling would price increase and inflation be equal.

    In this case, the effects of government meddling is so overwhelming that it is easy to lose sight of the true inflation picture.

  9. Yes, the black market price overstates the rate of inflation. Yes their is a illegality premium, there is a labor premium due to the crazy labor laws, there is a hysteria premium due to the psychological effect of consumers looking at empty shelves, there is a “hording” premium, there is an “over abundance” of bolivars premium, there is a “futility” premium that people feel watching their savings lose value and wondering whether their property rights to everything they own will last, and the list goes on.
    I can measure it simply by dividing prices by the official exchange rate and comparing those prices to those elsewhere outside Venezuela. It’s nowhere near the parallel dollar price.
    What does this mean? It means that policy is raising prices! It’s more political than economic. A change in government is the solution.

  10. Economists / news geeks of CCSCHRON:

    Is there a way to feasibly take scarcity into account when estimating inflation? I understand the way inflation is calculated nowadays includes shifts in consumption as a result of price changes. The availability of a product should also affect it’s share of the basket. I think the hardest part would be to find a good way to correlate scarcity index and actual impact on consumption patterns.

  11. When was the last time some one did a beans and butter post about what is actually available at the store, how many varieties and what is not available at any price? I think a regular run down of something like that would be impactful to people who do not even follow these blogs. As well as mud in the eye of Chavista’s.

  12. We may be experiencing the “End Game” of Chavismo. This is the establishment of an absolute State Monopoly through naked hegemony. My instinct: this is an aggressive “no-hold’s” attack that either wins or fails, and if it fails will be suicide. If it wins, it will be to establish absolute grip on all aspects of life in Venezuela, total onerous subjugation of everything and everyone! The Question: Is there enough oil production to sustain that kind of power?

  13. A more accurate question IMO would be are there enough courageous citizens willing to stand up to the onslaught by the cubans, and willing to step up civil disobedience and resistance by all means?

    • In the game of chess, the defence is to survive the attack. If the attack fails to win the game, the attacker is weakened and loses the game. The rules of war are very clear, you only counter-attack if you think you can defeat the attacker. If you can’t win, you defend, and if you can’t defend you retreat, and if you can’t retreat, you surrender!

      • Oh yes, if you surrender, the war continues! There is a cost in subjegating an enemy, it is a far better to win the hearts of the enemy. The opposition is in a much better position of winning the hearts of disillusioned Chavistas then vice versa.

  14. On the right measure of inflation when there are price controls, one approach is to calculate inflation on the goods without price controls. Taken to the extreme, this is what Hanke does by focusing on one single unregulated price (el Voldemort). But there are clear drawbacks, as you point out. The illegality premium you mention must be both big and rising, so there’s that.

    Another problem with his approach is that he assumes the real exchange rate (the price of Venezuela’s goods relative to the rest of the world, depends on the nominal exchange and inflation) is constant. We know now is exactly the time when the real exchange rate is depreciating, because Venezuela’st external revenue is taking a huge hit, and everybody is questioning the solvency of the sovereign. So the nominal depreciation (in the parallel market) should be larger than inflation, to help with external adjustment. How much is the real depreciation? 30%? 40%? 50%? 80? No one knows with certainty, but this should be drawing a big spread between inflation and nominal depreciation.

    Yet another problem (more speculative) is that, if many prices are controlled and there is scarcity, then the expansion in liquidity can only affect the prices of goods without price controls. So whereas before the increase in liquidity was spread evenly (roughly speaking), the bulk of it is now directed toward some goods, especially the all mighty dollar. So those prices will go up by more than if all prices were free to adjust (which is the right measure of inflation). It’s like a permanent overshooting.

    Also, let’s save the term “hyperinflation” for the real thing. Otherwise we will have to start adding superlatives.

  15. Very well-said. I would only add, that for the Friedman monetary theorists, in the short run (can be even a year, or longer), the relationship between money supply (M1) and inflation is not necessarily 1 to 1, as is evidenced worldwide today with massive Quantitative Easing coupled with relativey low inflation. And, in an open free market economy, without the past/current stresses of the free market economies of today, there can be a multiplier effect of as much as 5 to 1on the final (M3) money supply, as money is loaned and re-loaned through the banking system (not so, obviously, in the crippled Venezuelan economy). Finally, with an ever-expanding money supply for years, based on ever-increasing oil prices/dollars, coupled with price controls, and a controlled exchange rate, inflation/black market accelerate when the oil price/dollars stop increasing , as in the past year (end of the musical chairs). Hanke has probably exaggerated the real actual inflation rate, but perhaps a not-too distant future one, and his basic thesis of heading for economic ruin is correct.

    • Well, most obviously inflation is also determined by the velocity of money. It seems to be rising very quickly in Venezuela, as people seek to spend any cash as quickly as possible.

      Most of the rest of the world is doing quantitative easing and not experiencing inflation because monetary velocity is very low, people and companies are hoarding cash from Japan to Germany and everywhere in between.

      I’m sure you already know this, but I thought I’d add this on.

      • When you say velocity, it’s the rise of price between each transaction that is a problem, not the increase in number of transactions. This latter being a good sign in an economy when it is not accompanied by the former.

        • The musical chair analogy could apply. Certainly, holding gold, which has intrinsic value but produces no dividen and is only useful during times of great uncertainty as a hedge against an unstable currency yet is highly liquidable. The dollar is serving a similar function which drives up the black market rate, and this really is a commodity rate rather than inflation per se. What we may be seeing is partially a loss of confidence in the Bolivar. If so, Maduro’s antics may actually be doing nothing to restore confidence, and therefore may backfire altogether.

  16. “Here we’re almost outside the realm of economics and entering that of philosophy.”

    If a toaster falls behind the shelves where no one can see it, does it still have a price?

  17. “…Even as Hanke accepts the standard definition of hyperinflation as prices rising at more than 50% per month, he argues that Venezuela is already there…”

    What Hanke states is:
    “the implied monthly inflation rate has now ramped up to 36%, as shown in the chart below. That’s dangerously close to the hyperinflation threshold of 50% per month. ”

    Indicating that we’re close to getting there, but he never actually states we’re already in a Hyperinflation economy:

    “…At this pace, Venezuela could join the Hall of Shame as the world’s 60th episode of hyperinflation…”

    Even though his analysis might be flawed, I thought I should still point that out.

  18. Some very good questions asked about inflation here. However, the results of Maduro’s offensive will be much simpler to understand. Example: no country can survive economically when prices in certain sectors are fixed at 200%+ to well over 1000% profit. This is usury and there is no other name for it. Record profit margins = high inflation.

    Example of today: Bought HP 60 color cartridge. It cost me Bs.1599. Price in internet mis $20.99. So according to the formula used the the government to establish a fair Price as all thsi stuff is bought with 6.3 dollars the Price should be 20.99 x 6.3 = Bs. 132.24 x 35% shipping, handling and nationalization of 35% = Bs. 178.52 x max 30% profir margin = Bs. 232.08 x 12% IVA = Bs. 259.93. This is a speculative price hike of 515%.

    This store has not yet been inspected but I am certain that it will be. Cases like this will only serve to make people join the inspections as Consejos Comunales and Comunas to ensure that prices stay down.

    Wwe all know that this example has been repeated millions of times in the country. Howeever, inspections will not deter some merchants but seeing other being sent to prison wil.

    This morning on the program of the Fiscal General on RNV she connfirmed that 26 peolle are being held in custody for trail for serious cses of usury.

    It’s in everyone’s interests to sort out this mess and the government has a share in the blame by not acting when all this started in September 2012 ir even further back when the outrageous speculation started in 2008 with car prices where Banks and insurance companies joined in.

    In the meantimes let’s wait for the new prison sentences to be detailed in the habilitante which could be very draconian.

    Regarding posible shortages – that remains to be seen in a year’s tijme and by then most people would have bought what they needed.

    • Can’t wait to go shopping at ArturImport, where The mark-up will be half than at these speculators – just 257.5% and so prices will be so much lower than at the competition that he’ll take over the whole market, all the while turning a healthy profit, keeping the shelves constantly stocked and making him rich.

    • Arturo…did your daughter get her fridge? Where and how much?

      Curious I be, that surely she received a just price.

      If your just price for ink differs so widely from your market price, why did you pay it?

  19. Arthuro, who is able to pay his imports with CADIVI dollars …… Almost no1, therefor you can’t calculate with 6.3 micky mouse bolivars to the dollar!!


Please enter your comment!
Please enter your name here