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Venezuela's Economic Struggles May See Hyperinflation Returning

John Galt

Updated: January 8, 2023

Venezuela hyperinflation
Editor’s Note:

EDITOR'S NOTE: Venezuela has suffered hyperinflation at least twice in its recent history. The first monetary plunge took place in the late 1980s and again in the early 1990s. The second instance began in 2016 and is now just clawing itself out of the hyperinflationary cauldron. Or so it thought. Price increases are once again accelerating, hinting at a possible extension of this economic illness. So, what’s contributing to this monetary outbreak? An excess of the money supply? High levels of public debt? Political instability, and general loss of confidence in the government’s economic policies? Sounds a lot like America, don’t you think? The straw that breaks the camel’s back, so to speak, is the general loss of confidence in the local currency. This may or may not happen in America; loss of confidence in the dollar is picking up pace, but it won’t happen in a flash like the Venezuelan bolivar. Or, it may not happen at all if the US government fully digitizes cash. The flip side of that, however, is that Uncle Sam will be in full control, issuing all cash, monitoring all cash, and controlling everyone’s spending habits. This is where Uncle Sam takes on a Socialist bent, sacrificing the freedom of markets and individuals for a strong government-controlled currency

Venezuelan consumer prices rose at a sharp 37.2% clip in December from November, heightening the risk of a return to hyperinflation, according to estimates by the Venezuelan Finance Observatory, a non-governmental group of economists.

The private inflation estimate is key since Venezuela's central bank, which in October said annual inflation hit 155%, one of the highest rates globally, has not released consumer price data since then.

For nine consecutive months, consumer price inflation was in the single digits thanks to strict policies implemented by President Nicolas Maduro's government, anchoring the exchange rate, limiting public spending and increasing taxes.

After the policies were rolled out, authorities said Venezuela had emerged from a four-year streak of hyperinflation.

But the strategy has begun to crack, sources have told Reuters. Since November, the government has ramped up spending and demand for dollars has outstripped the central bank's foreign currency reserves, meanwhile the local bolivar currency has weakened further and impacted prices.

Venezuela's year-on-year inflation in December was likely 305.7%, the group estimated.

"Venezuela's economy is facing the danger of a hyperinflationary outbreak, which is gaining strength with the sustained devaluation of the bolivar carried out by the central bank," the group said in a statement.

The central bank did not respond to a Reuters request for comment.

In December, clothing and footwear prices rose 57.8% from the previous month, while household wares rose 55.8%, according to the estimates.

Cash flow into the country has dropped amid an exchange rate storm, with the government pausing cash payments in dollars to some suppliers, affecting the public sector.

 

Originally published at Reuters

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