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IMF Produces Another Bogus Venezuela Inflation Forecast

31 Jul 2018

Steve H. Hanke

The International Monetary Fund (IMF) has done it again. In an
attempt to garner some press, the head of the IMF’s Western
Hemisphere Department Alejandro Werner forecasted that
Venezuela’s annual inflation rate will reach
by year’s end. By my calculations, this
inflation forecast implies that the exchange rate will reach 923
million VEF/USD by December 2018. To put this into context, the
exchange rate at the end of July was 3.3 million VEF/USD, and at
the end of June it was 3.1 million VEF/USD.

No one has ever been able
to accurately forecast the course or the duration of an episode of

The IMF’s most recent inflation forecast is, to put it
mildly, stunning. It is also bogus. No one can forecast the course
or duration of a hyperinflation with any degree of accuracy. Never
mind. The IMF just keeps on making forecasts of Venezuela’s
inflation. And the press keeps on
uncritically reporting
the IMF’s bogus numbers as if they
were credible. The IMF and the press are clearly unaware of the
fact that hyperinflation can be measured, and measured very
accurately, but it cannot be forecasted.

To get a handle on the IMF’s production of bogus forecasts
for Venezuela’s inflation, consider that, during the past
year and a half, the IMF has reported a variety of numbers for the
annual inflation rate in Venezuela. None of the IMF’s numbers
can be replicated. This is a
— one that renders all of the IMF’s
inflation numbers unusable because, among other things, they fail
to pass the scientific smell test. The following is a catalogue of
the IMF’s inflation numbers for Venezuela that have been
reported since September 2016.

  • IMF

    World Economic Outlook
    , October 2017
    • End of 2016 annual inflation rate (Data Source - BCV):
    • End of 2017 annual inflation rate IMF projection: 1,133.0%
    • End of 2018 annual inflation rate IMF projection: 2529.6%
  • IMF

    World Economic Outlook
    , April 2018
    • End of 2017 annual inflation rate: 2,818.4%
    • End of 2018 annual inflation rate IMF projection:
    • End of 2019 annual inflation rate IMF projection:
  • Until the April 2018 World Economic Outlook (WEO), the
    IMF wrote the same general disclaimer about its Venezuelan numbers
    in each issue of its report:

    Projecting the economic outlook in Venezuela, including
    assessing past and current economic developments as the basis for
    the projections, is complicated by the lack of discussions with the
    authorities (the last Article IV consultation took place in 2004),
    long intervals in receiving data with information gaps, incomplete
    provision of information, and difficulties in interpreting certain
    reported economic indicators in line with economic

    In the April 2018 WEO, the disclaimer was altered. It now

    The effects of hyperinflation and the noted data gaps mean that
    IMF staff’s projected macroeconomic indicators need to be
    interpreted with caution.”

    These disclaimers are laughable. No one has ever been able to
    accurately forecast the course or the duration of an episode of
    hyperinflation. But, that hasn’t stopped the IMF from
    offering up inflation forecasts for Venezuela that have proven to
    be wildly inaccurate. And, for an example of the absurdity of the
    IMF’s projections, just consider its WEO year-end forecasts
    for 2018 and 2019. The values for both years are exactly the same:
    12,824.6%. These forecasts are blatantly absurd. After all, the
    current measured annual inflation rate is already by my
    calculations 33,151%. And the same forecasts for both 2018 and 2019
    contain a touch of spurious accuracy to boot: note the decimal
    point. And now we have a new forecast for 2018, a whopping

    So, forget the IMF’s forecasts of Venezuela’s
    hyperinflation. They are a prime example of junk science. Even
    though accurate forecasts of hyperinflation are not possible, very
    accurate measurements of hyperinflation can be made. Just how is
    this done?

    The most important price in an economy is the exchange rate
    between the local currency—in this case, the
    bolivar—and the world’s reserve currency, the U.S.
    dollar. As long as there is an active black market (read: free
    market) for currency and the data are available, changes in the
    black market exchange rate can be reliably transformed into
    accurate measurements of countrywide inflation rates. The economic
    principle of purchasing power parity (PPP) allows for this
    transformation. And the application of PPP to measure elevated
    inflation rates is rather simple.

    During periods of elevated inflation, PPP is the proper theory
    to use for measurement. Indeed, PPP holds during episodes of
    hyperinflation, and it holds very tightly. Beyond the theory of
    PPP, the intuition of why PPP represents the ‘gold
    standard’ for measuring inflation during hyperinflation
    episodes is clear. All items in an economy that is hyperinflating
    are either priced in a stable foreign currency (the U.S. dollar) or
    a local currency (the bolivar). If they are bolivar prices, they
    are determined by referring to the dollar prices of goods, and then
    converting them to local bolivar prices after checking with the
    spot black-market exchange rate. Indeed, when the price level is
    increasing rapidly and erratically on a day-by-day, hour-by-hour,
    or even minute-by-minute basis, exchange rate quotations are the
    only source of information on how fast inflation is actually
    proceeding. That is why PPP holds and why I and my
    Johns Hopkins-Cato Institute Troubled Currencies Project
    can use high-frequency (daily) data to calculate Venezuela’s
    annual inflation rate.

    Venezuela’s hyperinflation, which has been roaring away
    since November 2016, is depicted in the chart below. Today
    (7/31/18), the annual inflation rate for Venezuela sits at 33,151%.
    This accurate MEASUREMENT means that Venezuela is now experiencing
    23rd most severe
    episode of hyperinflation in history.

     is a professor of applied economics at The Johns
    Hopkins University and senior fellow at the Cato Institute.

    Click here to view the full article which appeared in CATO Journal