Best of the Week
Most Popular
1. Trumponomics Stock Market 2018 - The Manchurian President (1/2) - Nadeem_Walayat
2.Yield Curve Inversion a Remarkably Accurate Warning Indicator For Economic & Market Peril - Dan_Amerman
3.China is Now Officially at War With the US and Japan - Graham_Summers
4.Markets Pay Attention Moment - China’s Bubble Economy Ripe for Bursting - 16th Jul 18 - Plunger
5.Stock Market Longer-Term Charts Show Incredible Potential - Chris_Vermeulen
6.U.S. Stock Market Cycles Update - Jim_Curry
7.Another Stock Market Drop Next Week? - Brad_Gudgeon
8.The Death of the US Real Estate Dream - Harry_Dent
9.Gold Market Signal vs. Noise - Jordan_Roy_Byrne
10.The Fonzie–Ponzi Theory of Government Debt: An Update - F_F_Wiley
Last 7 days
Impulse Moves in the Currencies - 15th Aug 19
Best Merlin UK Theme Park Summer Holiday 2018 - Thorpe, Alton Towers, LegoLand or Chessington? - 15th Aug 19
The Essence of Writing an Essay that Must be Understood - 15th Aug 19
Is Solar Energy Rising From The Ashes Again? - 15th Aug 19
A Bullish Bond Argument That Hides in Plain Sight - 15th Aug 19
Jim Rogers on Gold, Silver, Bitcoin and Blockchain’s “Spectacular Future” - 15th Aug 19
A Depressed Economy And A Silver Boom - 15th Aug 19
Moving Averages Help You Define Market Trend – Here’s How - 14th Aug 18
It's Time for A New Economic Strategy in Turkey - 14th Aug 18
Gold Price to Plunge Below $1000 - Key Factors for Gold & Silver Investors - 14th Aug 18
Dow Stock Market Trend Forecast 2018 - Video - 13th Aug 18
Stock Market Downtrend to Continue? - 13th Aug 18
More Signs That the Stock Market Will Rally Until 2019 - 13th Aug 18
New Stock Market Correction Underway - 13th Aug 18
Talk Cold Turkey Economic Crisis - 13th Aug 18
Which UK Best Theme Park - Alton Towers vs Thorpe Park vs Lego Land vs Chessington World - 12th Aug 18
USD is Rising. What this Means for Currencies and Stocks - 12th Aug 18
Hardest US Housing Market Places to Live - Look Out Middle Class - 12th Aug 18
America’s Suburbs Are Making a Comeback - 12th Aug 18
Stock Market US Presidential Cycle, Seasonal Analysis and Economy - Video - 12th Aug 18
Yield Curve Inversion and the Stock Market - Video - 11th Aug 18
Land Rover Discovery Sport 1st Dealer Oil Change Service - What to Expect - 11th Aug 18
How to Setup Webinars and Use Them to Overcome the Barriers in E-Learning - 11th Aug 18
Big US Stocks’ Q2’18 Fundamentals - 11th Aug 18
Dow Stock Market Trend Forecast 2018 - 10th Aug 18
SPX Testing Its First Support Level - 10th Aug 18
Dreaming of a "Comfortable Retirement" on a Public Pension? - 10th Aug 18
The Forrest Gump of All Future Democrat Election Losses - 10th Aug 18
More Uncertainty as Stocks Got Closer to January Record High - 10th Aug 18
Gold and Silver Kill Zone - 9th Aug 18
Even More Cracks in the Gold Dam - 9th Aug 18
Ignore the Stock Market “midterm election year”, Which is “supposed” to be Weak - 9th Aug 18
Stock Market Trend and Volatility Analysis - Video - 9th Aug 18
Tips on Maximizing Small Serviced Offices Space - 9th Aug 18
VIX’s Collapse is Bullish for VIX and the Stock Market - 9th Aug 18
Vestles Platform Offers Several Key Trading Tools - 8th Aug 18
US Stock Markets Higher Until November 2018 - Part 2 - 8th Aug 18
US Stock Markets Higher Until November 2018 - Part 1 - 8th Aug 18
Stock Market US Presidential Cycle and Seasonal Analysis - 8th Aug 18
Is the Stock Market Correction Over? - 7th Aug 18
Yield Curve Inversion and the Stock Market - 7th Aug 18
Stock Market Elliott Wave Analysis and Forecast - Video - 7th Aug 18
Trade War! Win the Economic Hostilities Against the Chinese - 7th Aug 18
Technical Analyst Sees Silver as 'Oversold' - 7th Aug 18
Alex Jones Banned! Will Unapproved Opinions Be Censored Off the Internet? - 7th Aug 18
Gold and Silver Stocks On the Verge of the Next Major Decline - 7th Aug 18
First Time Buyers Need to ‘boost the affordability’ of Their Move Alone  - 7th Aug 18
Long Term Care Homes as an Investment are Heating Up! - 7th Aug 18
The Exponential Inflationary Stocks Bull Market - Video - 6th Aug 18
Land Rover Discovery Sport Oil Change Service Dash Warning Message - 6th Aug 18
Restructuring of Western Economic Power - 6th Aug 18
Stock Market Trend and Volatility Analysis - 6th Aug 18
Stock Market and Economy False Narratives That are Just Wrong - 6th Aug 18
VPN – Is It Worth It? - 6th Aug 18
All You Need to Know About Umbrella Companies - 6th Aug 18
Why China Lost the Trade War Before it Even Began - SSEC Stocks Index - Video - 5th Aug 18
Dow Stock Market Elliott Wave Analysis - 5th Aug 18
Iran's Rial Currency Is In A Death Spiral, Again - 5th Aug 18
IMF Produces Another Bogus Venezuela Inflation Forecast - 5th Aug 18
Gold & Silver Precious Metals Monthly Charts - 5th Aug 18
Time to Position for a Decade-Long Bull Market in Natural Resources - 5th Aug 18

Market Oracle FREE Newsletter

Trading Any Market

IMF Produces Another Bogus Venezuela Inflation Forecast

Economics / Inflation Aug 05, 2018 - 01:19 PM GMT

By: Steve_H_Hanke

Economics

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 1,000,000% 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.


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 problem -- 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 2016
    • End of 2015 annual inflation rate (Data Source - BCV): 180.9%
    • End of 2016 annual inflation rate projection: 720.0%
    • End of 2017 annual inflation rate projection: 2,200.0%
  • IMF World Economic Outlook, April 2017
    • End of 2016 annual inflation rate (Data Source - BCV): 274.4%
    • End of 2017 annual inflation rate projection: 1,133.8%
    • End of 2018 annual inflation rate projection: 2,529.6%
  • IMF World Economic Outlook, October 2017
    • End of 2016 annual inflation rate (Data Source - BCV): 302.6%
    • 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: 12,874.6%
    • End of 2019 annual inflation rate IMF projection: 12,874.6%

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 developments.”

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

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 1,000,000%.

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 team 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 the 23rd most severe episode of hyperinflation in history.

By Steve H. Hanke

www.cato.org/people/hanke.html

Twitter: @Steve_Hanke

Steve H. Hanke is a Professor of Applied Economics and Co-Director of the Institute for Applied Economics, Global Health, and the Study of Business Enterprise at The Johns Hopkins University in Baltimore. Prof. Hanke is also a Senior Fellow at the Cato Institute in Washington, D.C.; a Distinguished Professor at the Universitas Pelita Harapan in Jakarta, Indonesia; a Senior Advisor at the Renmin University of China’s International Monetary Research Institute in Beijing; a Special Counselor to the Center for Financial Stability in New York; a member of the National Bank of Kuwait’s International Advisory Board (chaired by Sir John Major); a member of the Financial Advisory Council of the United Arab Emirates; and a contributing editor at Globe Asia Magazine.

Copyright © 2018 Steve H. Hanke - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Steve H. Hanke Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules