(Bloomberg) — Inflation is picking up again in Venezuela, threatening to undermine President Nicolas Maduro’s fragile economic recovery and revive a wave of immigration that is just beginning to subside.
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Prices have risen at an annual rate of 359% over the past three months, according to an index compiled by Bloomberg. While that’s well below the highest hyperinflation spikes in recent years – the index registered nearly 300,000% again in 2019 – it is up significantly from earlier this year.
The sharp rise in prices reveals an important shift in Maduro’s policy. After years of reining in spending and cutting a ballooning budget deficit, the government is easing fiscal constraints again, disbursing money for everything from holiday bonuses to grants to Socialist Party loyalists. All this extra cash in the economy is fueling the depreciation of the bolivar against the dollar and driving up consumer prices.
“Venezuela has technically come out of hyperinflation, but it is stuck in high monthly inflation rates,” said Daniel Cadenas, professor of economics at the Metropolitan University of Caracas. We will not see less than 100% annual inflation unless there is a change in economic policy.
Cadenas said the pain of diminishing purchasing power is one of the reasons people are forcing them to migrate. More than 7 million have already left the country in recent years, according to United Nations estimates, with tens of thousands arriving at the US border this year.
Venezuela has Dubai-like prices for products while people pay Sudan-like salaries. This mostly affects the poor, 93% or the population, Cadenas said.
By allowing the US dollar to circulate freely, the Maduro administration has stimulated increased consumer spending, which, along with a modest increase in oil production, is leading to a sudden economic recovery. Gross domestic product is expected to expand by 6% this year, according to the International Monetary Fund. While this will be the largest expansion in 15 years, the economy remains a shadow of what it once was.
Maduro touted the recovery as an unlikely return to a country sanctioned by the United States. “An oppressed, tortured, punished, and blocked country has found a way by using its own engines to revitalize the real economy,” he said last week.
Venezuela emerged from hyperinflation in January after the central bank’s decision to increase the supply of dollars in the official exchange market. The strategy yielded some results at the start of the year, with monthly inflation declining in March.
But price increases have accelerated recently. The central bank reported that consumer prices rose in August – the latest data available – while the opposing financial observatory said annual inflation was close to 157%. Bloomberg’s Cafe con Leche index — based on the price of a cup of coffee in Caracas — puts the number at 158% last year.
Some economists have expected annual inflation to be below 100% in 2022.
The bolivar has weakened by a third in the past three months, to about 9 bolivars per dollar. Cadenas said the easing of public spending restrictions has led to a “significant” increase in the supply of local currency, boosting demand for US dollars.
The trend is likely to worsen as the government makes more year-end payments to public servants, said Tamara Herrera, director of financial analysis firm Sintesis Financiera, which will boost demand for bolivar ahead of its Christmas shopping spree.
Government spending has risen to 18% of GDP this year, compared to about 12% in 2021, Herrera estimates. It predicts it will rise further to 21% of GDP next year.
The pains of rising prices and the impact of years of immigration are being felt in the Chacao market in eastern Caracas, a relatively affluent area of the capital. The sellers out there are struggling to keep up.
Many customers at Café Sonia Benavides have left the country. Those who stayed buy only what they need.
The 67-year-old Benavides is considering using cheaper, lower quality products to keep her prices down. She’s already nearly doubled what she charges for a large latte in the past three months, to $1.95. “It’s either good quality or good price, it’s impossible to get both,” she said.
– With the help of Nicole Yabor.
(Adding public spending estimates in paragraph 14)
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