The struggle to balance inflation and shortages in Venezuela

Inflation in Venezuela has increased by a factor of more than 500 percent since 2003, and most producers are having a hard time selling government-regulated products at a profit.

Miguel Octavio
Graph of goods' price changes in Venezuela from 2003 to 2011

A recent El Universal has an article talking about how hard it is for local producers in Venezuela to sell regulated products at a profit, which leads to shortages. The government, of course, denies there are shortages, saying the whole thing is a “mediatic campaign” by sectors that control these products and want to have “exorbitant” profits.

Shortages are measured by Cavidea, pollsters, and the Venezuelan Central Bank. Cavidea says shortages are running at 20 percent, in perfect agreement with Datanalisis, which gives the same number, up from 9 percent a year ago. The Venezuelan Central Bank gave for August (Cavidea and Datanalisis are for September) a lower value of 13.5 percent.

In order to look at this problem long term, I made a rather busy chart, shown at left, in which I took the price for some basic products, all regulated, normalizing it to the price in 2003, when controls began and included inflation (in bright red), also normalized to 1 in 2003 and the price of the official dollar, which I did not normalize (in dark blue).

As you can see, if one compares to inflation, all prices are behind the inflation curve. This curve is also not complete, as inflation for this year is not included in the plot, 2003 inflation is added in 2004, 2004 in 2005, and so forth.

Of course, the government gives foreign currency to some importers to bring these products from abroad, so that a comparison to the official dollar for imports may be fairer in some cases, with the caveat that even if you import all your products, you still have local costs that keep increasing every year at a good clip.

However, most of the regulated products I included in this chart are made in Venezuela, with the exception of milk. Interestingly, this item, which is currently one of the most difficult to find in markets, has kept up rather well with the inflation curve, rather than the US dollar curve, despite being mostly imported. In contrast, vegetable oil producers are being squeezed, no matter which comparison you make, to either inflation or the official dollar, lagging by 250 percent the inflation index. So have pasta producers.

Other products, like rice, after holding them back for the first few years of controls, have kept up rather well in the last few years.

However, from the chart it is clear that it must not be easy for any of these producers to make money if one compares to inflation. After all, we are talking about the fact that inflation has increased by a factor of more than 500 percent since 2003, while only rice and meat have managed comparable gains in prices of more than 450 percent.

This graph also shows why the government shoots itself in the foot in its goal to reduce inflation: The more that it holds back price increases, the more inflation will be held back until next year, making it practically impossible to reduce the yearly consumer price index (CPI). In fact, in 2001 the CPI was only 13.1 percent, in the absence of price controls and exchange controls, but just about then, the government began to spend beyond its means, needing a devaluation in 2002, which pushed inflation higher, and introducing price controls and exchange controls in 2003. Inflation went down in 2005 and 2006, precisely because many price increases were held back. That is what is fueling inflation these days, just trying to manage the balance between shortages and inflation.

Like so much under Hugo Chavez it is an impossible policy in the long-term. Something has to give. It is a vicious cycle: if you hold back prices you create shortages, if you don’t allow prices to go up to fair value, you push inflation into the future. If you don’t allow for reasonable profits, you get less investment and fewer products.

But the revolution thinks it’s winning.

--- Miguel Octavio, a Venezuelan, is not a fan of Venezuelan President Hugo Chavez. You can read his blog here.

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