The eternal vicious cycle of inflation and shortages under Chavez’ revolution.

October 2, 2011

Today’s El Universal has an article talking about how hard it is for local producers 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%, in perfect agreement with Datanalisis, which gives the same number, up from 9% a year ago. The Venezuelan Central Bank gave for August (Cavidea and Datanalisis are for September) a lower value of 13.5%.

In order to look at this problem long term, I made a rather busy chart, shown below, 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 an 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 caveats, that even if you import all your product, you still have local costs that keep increasing every year at a good clip.

However, most of the regulated products I included in his 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% 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% since 2003, while only rice and meat, have managed comparable gains in prices of more than 450%.

This graph also show 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 CPI. In fact, in 2001 the CPI was only 13.1%, 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 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

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40 Responses to “The eternal vicious cycle of inflation and shortages under Chavez’ revolution.”

  1. test Says:

    The Zune concentrates on being a Portable Media Player. Not a web browser. Not a game machine. Maybe in the future it’ll do even better in those areas, but for now it’s a fantastic way to organize and listen to your music and videos, and is without peer in that regard. The iPod’s strengths are its web browsing and apps. If those sound more compelling, perhaps it is your best choice

  2. Bill S. Says:

    Concentrated hydrogen peroxide will probably never be used as a fuel. It is too easy to use it to make powerful, but dangerously unstable, explosives. I think it sunk the Russian sub, Kursk, a few years ago. The London and Madrid bus and train bombers may have also used it to make their explosives. Selling over a few percent concentration to the public is nuts.
    The constant parade of high ranking US officials suddenly revealing previously secret evidence that elements of the Pakistani government have been directly involved in killing US soldiers in Afghanistan, is starting to make me wonder why. Could they be preparing the American public for some action inside Pakistan? Bombing maybe? They are making public secret intelligence that goes back to 2004. I suspect that the next time it happens, it will elicit a violent response. But it might be a coincidence.

    • m_astera Says:

      Bill-

      Isn’t gasoline a little dangerous too? Ever hear of a fuel-air bomb?

      But I guess what you are saying is that only the government should have access to dangerous things, not ordinary people. Probably because of the wisdom, intelligence, maturity and good judgment everyone in government demonstrates. Funny how that works, as soon as someone gets elected or hired for a government job they become competent and know what’s best for the plebes. And those who love government and want to be taken care of support that 100%.

  3. loroferoz Says:

    In 2009 when I came back to Venezuela and saw prices changing monthly, I thought “we are in the threshold of hyperinflation”.

    Then I thought I was wrong. Now, your graphic, with the exponential trend of inflation makes me think I was not that off target.

    Shortages are a natural consequence of price controls + inflation.

    Now for the million dollar question: Any ideas as to how this period will end?

  4. moctavio Says:

    Of course Andres, the inflation is all money supply, the lag is the controls, it is an impossible time bomb.

    • JMA Says:

      Petrostate (Venezuela): increased revenue = increased spending coupled with stalled supply (of everything) = inflation.

  5. Andres F Says:

    Like the graph Miguel, however I believe the greater cause for inflation is government spending and not so much price controls. In Venezuela a change in oil price, means severe change in the money supply.

  6. Roy Says:

    The idea that Chavez is incompetent, or that he doesn’t know what he is doing with regards to food production and imports fails to understand Chavez’s goals.

    He wants to control who you work for, where you live and what you eat.
    Castro stumbled on this formula by accident, but in retrospect realized that it was the only way to satay in-power til he dies.

    Chavez knows that price controls don’t work, he had bean to Cuba before becoming president, so he knows the realty better than most, but Chavez wants to rule till 2020 and then some, so doesn’t care if Venezuelans have to mix ground peas with coffee as a filler, as Cubans do.

    When he has complete control (read 2012) he will bring out the ration book and cut back on imports, to make sure his cronies have enough money to enjoy the good life.

    So keep believing he’s a nincompoop, hes being coached by the master,, Fidel Castro.

  7. m_astera Says:

    As it should be. Production cost of 50%H2O2 is around 34 cents a gallon.
    http://www.americanenergyindependence.com/peroxide.aspx

    What is sold in the farmacias is 3% H202, so around 2 cents worth of H2O2 per gallon of 3% agua oxigenada.

    • moctavio Says:

      Yes, but quality control is difficult, you have to sell it in plastic, not glass or can, which is cheaper. It is a money losing operation.

  8. Carolina Says:

    Miguel – have you ever done any inflation analysis like this but with housing prices?
    Isn’t it a thing that hasn’t been regulated (yet) and still works based on offer and demand? Am I right?

    • moctavio Says:

      Yes, good residential property has held up quite well in US$, no regulation, but also the lack of new properties for sale. It’s a little cool right now, hard to sell stuff…

  9. Francisco Toro Says:

    Aristóbulo hard at work trying to torpedo a handover to Maduro…curioser and curioser…

  10. island canuck Says:

    Your afternoon smile:
    Istúriz: A Nicolás Maduro le ofrecieron la vicepresidencia de la transición

    El vicepresidente del Partido Socialista Unido de Venezuela (PSUV) para la Región Central, Aristóbulo Istúriz, advirtió este lunes sobre planes desestabilizadores de “grupos guerreristas venezolanos”, impulsados por factores externos, con el objetivo de aislar a Venezuela en el plano internacional y provocar caos en el país.
    En rueda de prensa, el dirigente psuvista aseveró que “tenemos informaciones de que para octubre tienen planes tipo guarimba, para provocar desestabilización” y expresó que el propósito de los planes de la oposición es levantar un expediente en contra de Venezuela sobre Derechos Humanos.

    “Los factores de oposición, dirigidos desde la gran oligarquía internacional, vienen a tratar de impulsar desestabilización, lo que pone en evidencia que hay un plan que busca aislar a Venezuela y provocar caos”, enfatizó Istúriz.
    Y no sería sólo desde el exterior, pues Iztúriz denunció que tratan de dividir al PSUV: “Yo vi por allí una carta que envía (Eduardo) Semtei a Nicolás Maduro, llamándolo a ser Vicepresidente de la transición, tratando de sembrar cizaña. No, nosotros no mordemos esa cizaña”.

    “En ningún momento histórico nosotros habíamos estado tan unidos y tan activados en la movilización y organización como lo estamos en este momento”, dijo Istúriz.

    http://www.lapatilla.com/site/2011/10/03/izturiz-a-nicolas-maduro-le-ofrecieron-la-vicepresidencia-de-la-transicion/

    Miguel, did you have anything to do with this?? 🙂

  11. moctavio Says:

    Hydrogen Peroxide is cheaper than Coca Cola here

  12. Arco3 Says:

    cat food in a bag (gatsy) costed me 28bsf per kilo today!! I’m a fisherman and I sell my tuna for 15bsf per kilo. go figure. It doesn’t make any sense.

    • Syd Says:

      I think your gato and your bolsillo would be happier if you exchanged the gatsy for tuna.
      processing always adds an extra layer of cost, you know. Ditto for an import.

    • island canuck Says:

      I’ve never understood the price of cat food here. The price has always been astronomical in comparison to the rest of costs or incomes.

      Let’s talk about bacon. How can a package of 300 grams of Oscar Mayer cost BsF.50+ when it’s produced here with Venezuelan wages? At the official rate that’s US$17.50 per lb. Even at the unofficial rate it’s around US$9.40 per lb.

  13. island canuck Says:

    John,
    First of all Venezuelanalysis is a pure propaganda outlet for the Chavez government.

    Prior to 1999 there was no milk shortage, either liquid or long duration. The counters were full of Mi Vaca, etc. Cans of locally produced milk powder were plentiful.

    After 1999 when controls started (around 2002 if I remember correctly the shortages started & you started seeing imported milk products on the shelves.

    Now we see shortages in everything – meat, poultry, milk, cooking oil, arepa flour, coffee, sugar, etc., etc.

    These shortages are a result of price controls, exchange controls & expropriations that have failed once the government got their hands on them.

    • island canuck Says:

      John, here is a story that Venezuelanalysis would never publish:
      http://www.eltiempo.com/mundo/latinoamerica/el-millonario-bolsillo-personal-de-hugo-chavez_10479804-4

    • John Barnard Says:

      Thanks, Island. I know what Venezuelanalysis is, I just get a kick out of fact-checking their more outlandish claims. I read the PSF rag just to see how they spin things. When I saw Tamara’s claim, it floored me. She’s a true believer.

    • CharlesC Says:

      You are right, Island Canuck- and how many large farms have been expropriated and are not producing milk an cheese-Las Carolinas-for example?Welcome to Zimbabzuela..
      Another wrong investment in wrong place-milk factory built by Iran
      -where there are no freakin cows for hundreds of miles…

      • CharlesC Says:

        whatever happened to those “genetics for milk production” _Chavez
        was supposed to get from Uruguay -years ago -(traded oil for
        embryos-hahaha)Chavez bragged that Venezuela was getting the
        top milk producing genetics in a trade for oil -at the time I commented
        -why would a president be involved in personally trading few barrels of oil for semen and eggs-this is actually -very small scale -but- Chavez at the time was everywhere EVERYWHERE talking about “barter system” and how well it worked -example barter system with Cuba and other ALBA
        countries- Heard anymore about that? And the Sucre (I call “kisses)?

  14. moctavio Says:

    There is no production because of overregulation. As to Harina Pan, it is not just corn, it is more sophisticated than that, but there were competitors, and are, which exit the market because of regulation. It is a chicken and egg problem, what the Government is doing is destroying local production by making all of the imports, which are brought in at the official exchange rate, it is impossible to be competitive with that. The problem is the Government believes in conucos, this is a world in which us farmers move to brazil to produce stuff, you need technology, know how, not conucos.

    • CharlesC Says:

      You are right, but, even the “conucos”-chavistas don’t know what they are doing-hence the need for 900 cuban farmer advisors. If there are 900 cuban farm advisors in Venezuela-they are all living with chavistas -maybe working on some of the properties expropriated and now in the hands of Generals who know nothing about farming…

  15. John Barnard Says:

    Tamara Pearson has an anecdotal article up today at Venezuelanalysis which says the following: ““There has always been milk scarcity, and it was bought on the black market. Most of it came from New Zealand [where as today, most milk is locally produced].”

    Anyone have statistics available to refute this? …that “most” milk is locally produced? And if it’s true, how much fresh milk is consumed vs. powdered milk?

  16. bruni Says:

    Miguel, I am not defending the government policies here, that have been wrong in so many aspects, but with respect to food I would like to know what is, according to you, the solution? Since there is not enough production in the country there is no competition, if you leave prices to float there is no way people could sustain themselves.

    How many Harina Pan producers are there in Venezuela? How many vegetable oil producers there are? You can count them with one hand, maximum two. It is a monopolistic or oligopolistic market.

    Free market policies function only in competitive markets.

    • deananash Says:

      I’ve got this one, Miguel. Bruni, ideally you’d deregulate the industry in terms of both price controls and imports. When you have true freedom in a market, and companies are earning too much profit, that simply invites more competitors and soon enough, prices stabilize at a fair price.

      Simply freeing prices without free trade would cause a short term (6 months) shortage, but then, the exaggerated profits would inspire more local production…

  17. Leo Says:

    It would interesting to calculate real/net salaries against the CPI you just showed up.

  18. captainccs Says:

    Miguel, I have my own “inflation meter,” my supermarket shopping cart. I’m pretty much set in my ways and my shopping does not change much from trip to trip to the supermarket. I returned to Venezuela in 1990 so I have “statistics” for the past 22 years. Prices have been incredibly stable! It all depends on what yardstick you use to measure it.

    Of course, the price in bolivares has been skyrocketing as you point out. Every time I get my bill I’m indignant at the increase in prices. Then I convert the bolivares into US dollars and the cost of my full shopping cart remains in the range of $100 to $125. 2011 has been the exception, the cart now runs closer to $150.

    Until Viernes Negro, February 18, 1983, the bolivar/dollar exchange rate was fairly stable going from 3.35 in 1960 to 4.50 (or was it 4.30?). Since then the rate has climbed to Bs.8,960.00 per USD. That is a 30.6% annual devaluation which, for people earning a salary in bolivares, converts to a rate of inflation of 30.6%. As you can see, this did not start with Chavez. Chavez is the natural continuation of Luis Herrera, Jaime Luscinchi, CAP, Velasquez, and Chiripero Calerda.

    This is NOT a defense of Chavez. It is a condemnation of the failed socialist policies since Romulo Betancourt took over in 1958. Yes, Chavez is a cancer but he is a cancer that grew in fertile ground — well watered with plenty of oil. Getting rid of Chavez is not enough. We have to get rid of the non-productive populist policies that ALL of our governments since Betancourt have followed.

    • moctavio Says:

      Wait, wait. poor Betancourt, Leoni and Caldera I. Under them, the Venezuelan Central Bank was independent, truly independent and prices were flat, inflation was minimal. Thus, it would be unfair to bunch them in the group if you are talking about prices.

      As for prices incredibly stable, the chart says otherwise in terms of basic food, from 2003 to 2007 was totally different than since 2007.

      And yes, of course the policies are to blame, but there is more repressed inflation now than there has ever been, for the simple fact that there has never been more controls than today.

      • captainccs Says:

        Miguel, I’m willing to exonerate Betancourt and Leoni but not Caldera. Economies don’t turn on a dime. Betancourt inherited a good economy from Marcos Perez Jimenez and promptly set about destroying it by stopping the construction industry which is what creates jobs in Venezuela. But Betancourt was not just a smart politician, he was a pragmatist. He saw the error of his ways and rectified. Leoni was well liked but lackluster and he just kept things going.

        Caldera started the downhill ride with impossible labor laws. CAP followed with worse laws, price controls, and the nationalization of the oil industry. It wasn’t long before Luis Herrera started using PDVSA as a piggy bank. The rest is history.

        The one good thing Caldera did in his first presidency was to pardon a bunch of assassins, a.k.a. terrorists, a.k.a. guerrillas: Petkoff, Martin, Moleiro, Comandante Fausto and some others. Of course, when he tried it again, he have us ¡HUGO PRESIDENTE!

        • JMA Says:

          Totally agree with your thoughts. The essence of Venezuela’s problems reside in the creation of the Petro-State. Things weren’t bad during Betancourt’s and Leoni’s terms, but sure as hell the seeds of populism were already well planted. Regarding Caldera, I disagree. Setting aside the fact that people should be judged according to what their actions were in a distinct context, you cannot have peace at any price. If you are a freaking terrorist, you pay for it. Caldera with his actions told the country that some crimes should not be punished. The country could have lived very well without Petkoff, Martin, Moleiro, Fausto and … Chavez.

        • moctavio Says:

          I am no fan of Caldera, but the inflation problem truly began with CAP. Caldera introduced big Government and overregulation, fortunately his party was not reelected, unfortunately, oil went up, CAP came with his Gran Venezuela.

        • Roberto N Says:

          I have to agree with Captain CCS, insofar as labor laws. MOctavio’s comment about CAP and the Gran Venezuela also.

          The seeds of destruction are in the hike in oil prices after 1976 that filled the coffers and taught Venezuela it didn’t have to work. Like the guy who wins the lottery jackpot and ends up with cirrhosis……………..

    • Roger Says:

      I agree with you Capitan. All Chavez has done is make things worse than the others did and shift the wealth around. Perhaps subsidizing the Mercals so as to make the pain on the poor slightly less is a slight positive but mostly a vote getter?
      The big question is if the Young Turks running for president can bring forth a better economic plan that the majority of Venezuelans will support.


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