Archive for December 4th, 2007

Inflation soars in November, thanks to the Governments incompetence

December 4, 2007

Accumulated 12-month inflation reported each month by the Venezuelan Central Bank this year for the CPI and three of the most important components of the CPI.

The Government was supposed to have reported the CPI numbers last Saturday, but the supposedly “independent” Central Bank postponed it until Monday so as not to have an impact on the vote on Sunday. As if everyday Venezuelans did not feel inflation every time they go to the supermarkets.

The graph above presents 12 month inflation as reported by the Venezuelan Central Bank (sorry about the months in Spanish, it’s good practice for you if you are not fluent anyway).

First, let’s look at the CPI. Minister Cabezas has been saying all year that the CPI will be around 12%. He was brought in to fight inflation. Only two months ago he was claiming success. These numbers represent an absolute defeat to his beliefs that monetary expansion does not cause inflation and that his policies are a failure. He should be out, he should be fired, the graph above, together with the shortages played a very important role in Sunday’s defeat. Unfortunately, it is only going to get worse going forward.

In the graph I have place two arrows, one in March and another in June, when cuts in the value added tax (VAT) were implemented, a cut of 3% in March and another of 2% in June as a way of lowering inflation. Of course, these events did not change structural inflation, they just changed the monthly numbers reported, leaving everything the same. The CPI as you can see from the graph, began the year around 17% annualized and managed to stay below the 20% level thanks to these artificial cuts in the VAT…until this month…

You see, VAT collection is as important as oil in Venezuela in collecting funds for the Government to spend. When some genius came up with the idea of dressing inflation up by cutting the VAT, this person did not seem to realize that it was also significantly reducing the income the Government would have for the year. Then at some point in October another genius (or the same one?) realized this and came up with the perverse Financial Transaction Tax (ITF) to make up the difference in tax collection. Perverse, because when you collect a VAT, each producer/merchant/entity in the chain can subtract from the VAT, what it has paid along the way. That is,. if the tax is 1.5% on the final product or good, the final person can deduct from the tax paid the tax it paid to obtain, for example, the components to make the goods sold.

In contrast, the Financial Transaction Tax (ITF) imposed by Chavez on companies is cumulative, each company along the chain has to pay 1.5% every time it issues a check or makes a debit on a transaction. But this is not deductible at all. Thus, if the tax is 1.5% like in Venezuela, it adds 1.5% at each stage. This is highly inflationary, but the Tax Superintendent kept claiming it was not and it would not affect individual, who are exempt from the tax. But it certainly was inflationary, as the CPI jumped 4.4% for the month of November, reaching an accumulated value of 20.8% for the last twelve months. Thus, it may even be possible for the CPI to double the Minister’s target of 12%, since the CPI is very likely to be high again. (I should also criticize the economists who participate in Reuters’ poll on inflation, the Editor of Veneconomy had the high estimate of 4%, but the average was below 3%, which simply indicates Toby Bottome was the only one to do his homework right)

But if accumulated inflation of 20.9% for the last 12 months sounds bad, look at the value for Food and Beverages, the single most important component for poor people. Despite controls, that value has now reached 29.2% in the last twelve months and is certainly to be above 30% for the full year of 2007. This, despite (or because!) price controls in the most basic food products imposed by the Government.

But the graph actually does not look so bad, because I have included in
it the group Alcoholic Beverages and Tobacco, the “vice” group, which is
up a whopping 57% for the year, as the Government increased taxes and
removed alcoholic beverages from the CADIVI preferential dollar list. Finally, I also included health costs in the graph, which are up over 27% for the year.

And this graph shows not only why Chavez reform lost on Sunday, but also why his popularity will continue to go down in the upcoming months. These are more than numbers, this is what people feel when they go to the market every day to buy their food and supplies. Not only do the poor “feel” it more because they use more of their income for these items above, but they have more problems dealing with shortages. When I start having problems finding toilet paper in the stores, like last week, I simply buy lots of it when I find it. The poor can simply not afford such a luxury.

While the inflation numbers will not have again the “kick” of the ITF in November, structural inflation will only get worse, not better, and unless Chavez gets rid of his economic team and finds people who understand these problems, this trend will be extremely hard to reverse.

His future, like last Sunday, depends strongly on this.