Price of food basket at an all time high

January 29, 2006

At a seminar last week, which I was unable to attend, an economist presented some general graphs about the Venezuelan economy in 2005 and 2006. I got the presentation and reviewing it ,was surprised by a header which said that the price of one Venezuelan “Basic Food Basket” was at an all time high in US dollars. This seemed counterintuitive to me, because this should only happen at times of overvaluation of the currency, which is not the case at this time. I then decided to plot in the same graph the minimum salary (in red, scale on the left) in those same years and compare it to the average price for the Venezuelan food basket (in blue, right scale), both in US dollars. This has the advantage of being a fair comparison, as both are numbers generated by the Government and if anything the food basket is underestiamted, since the Government uses only Mercal prices to calculate it. Moreover, below classes C, people who have a job make only minimum salary

The graph is amazing. What it says is that while the minimum salary has yet to recover to the level of the year 2000, in the meantime the price of the food basket (which I think is for one person in this case, but was not defined in the presentation) has gone up by 150%. This is truly perverse, as it implies the purchasing power of those that have a salary has done terribly in the last five years.

Economists in Venezuela are mostly againt the dollarization of the economy, but when I see a graph like the one above, being an amateur economist, I can’t help but disagree. The argument against dollarization is that growth becomes harder to achieve. Well, the argument for dollarization is that people would not get screwed by irresponsible Government policies, like in the last five years (and in 1989 and 1995) when devaluations decimated the purchasing power of the common people without any compensation. If the economy were dollarized, salaries would retain their purchasing power and the availability of imported goods, which are determined in US$ by inflation abroad and not in Venezuela, would keep prices in check. Only politicians benefit from a devaluation in the end.

Not being an economist, I still find the huge increase in the price of the food basket above quite surprising. I knew that inflation in food was much higher bthan the CPI quoted by the Central Bank, but had no idea it was so bad. It also shows how ineffective price controls are as it is precisely foodstuffs which are controlled since 2003. It would seem to me that the graph says that there is too much money going after few goods which is the result of the lack of production locally, which dropped in the last few years. Any alternate explanations would be welcome.

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