Commentary

Letter to the Editor: Venezuela Hit by Fears of Hyperinflation and Recession

Dear Sir:

Benedict Mander’s reportage, “Venezuela hit by fears of hyperinflation and recession” (10 June 2013), adds confusion to the subject of hyperinflation, as well as to Venezuela’s inflation story. The piece mentions two definitions of hyperinflation, neither of which is used in economic research: one was dreamed up by Goldman Sachs (“seasonally adjusted annualized rates of more than 40 per cent”) and the other by the International Accounting Standards Board (“a cumulative rate of 100 per cent over three years”).

Mr. Mander protects his text by asserting that “there is no fixed definition of hyperinflation”. But, there actually is a recognized scientific definition of hyperinflation. This convention, articulated in Prof. Phillip Cagan’s seminal 1956 paper, “The Monetary Dynamics of Hyperinflation”, holds that hyperinflation begins when the monthly inflation rate exceeds 50%. This is the definition that Nicholas Krus and I utilized in documenting all 56 hyperinflations in world history (“World Hyperinflations” in: The Routledge Handbook of Major Events in Economic History, 2013). Indeed, Cagan’s 50%-per-month threshold is the standard definition of hyperinflation used in economic research.

Official statistics put Venezuela’s monthly inflation rate for May at 6.1%. But, official statistics never tell the real story in a place like Venezuela. Using changes in the bolivar’s black-market U.S. dollar exchange rate, I estimate that the true monthly inflation rate for May was 11.4%. That’s almost twice the official rate, but it is not even close to the hyperinflation threshold of 50% per month. Venezuela has a serious inflation problem, but the situation will have to deteriorate significantly before Venezuela can join the other 56 cases in the hyperinflation hall of shame.

Steve H. Hanke is a Professor of Applied Economics at The Johns Hopkins University in Baltimore and a Senior Fellow at the Cato Institute in Washington, D.C.