Venezuela’s inflation is at 29 percent, and how that relates to the US

COLUMN: The US should look to Venezuela as an example of what happens to central banks that aren’t solely focused on controlling inflation.

Venezuela’s inflation is at 29 percent and Argentina’s actual inflation (many allege the government data is fraudulent) is north of 20 percent.

Central banks in Argentina and Venezuela set large negative real interest rates. Moreover, the monetary government deficit financing is over 10 percent of GDP, according to Nomura Global Economics.

The reason is that these central banks aren’t independent from their Treasuries and are pressured to finance government spending.

Meanwhile, Latin American countries with independent inflation targeting central banks have more sensible policies and produce inflation in the single digits.

The lesson for the US is that central banks perform the best when they solely focus on price stability.

The Federal Reserve, however, is burdened with the mandate of supporting the economy. It’s also directly lending money to the US Treasury. So even with inflation rising above 2 percent, the Federal Reserve continues its controversial policy of quantitative easing and leaves interest rates unchanged at 0.25 percent.

It’s now in serious danger of falling behind the curve to normalize monetary policy and contain inflation, which may surge well above the optimal neighborhood of 2 percent in the coming years.

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