Making sense of meaningless 1M% inflation figure

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

29 July 2018

The International Monetary Fund (IMF) recently published a report in which they projected that the inflation rate of Venezuela will reach one million per cent by the end of this year. Yes: 1,000,000 per cent!

When read about that projection in the press, the first question in my mind was: exactly how large is that rate? Then I started wondering whether this is worse that what prevailed in Zimbabwe 10 years ago. Furthermore, could this be the worst inflation ever recorded in history?

Before trying to fathom the meaning of this “hyperinflation” figure, I must repeat something that I have noted in this column several times before: percentages that are larger that 100 per cent are both meaningless and confusing.

Meaningless because talking about, say, 150 parts out of 100, is total nonsense! You simply cannot take 150 things out of a basket containing 100. So, even though seemingly bright people (for example, the folks at the IMF) keep referring to such figures, that doesn’t negate the fact that they are meaningless.

Secondly, such percentages are confusing because most people are not able to discern the multiplication factor. For example: if your salary is increased by 300 per cent, how many times is your new pay compared to the old one? Is it three or four, or even 300 times?

Instead of talking about a confusing and meaningless number like one million percent, the IMF should have told us the multiplication factor of prices expected by the end of the year. Say; “we project that the average price of goods and services will rise by a factor of ‘Y’ by the end of this year”

Now, the one million per cent inflation for Venezuela is an annualised figure; that is, prices will be rising at that rate per year. Since 1,000,000 divided by 100 is 10,000; it follows that prices would go up by a factor of 10,000 in 12 months.

Naturally, we might want to know what increment to expect per month. In other words, what number can we multiply by itself 12 times to get 10,000? The answer is the twelfth root of 10,000, that is, 2.15. In other words: should double prices double every month. If bread is costing Sh40 today, it will be Sh80 by the end of August! I think this is easier to conceptualise than saying one million percent.

But, is this worse than the situation in Zimbabwe in 2008? The answer is no. In November 2008, prices in that country were doubling every day! You bought bread today at Sh40 and tomorrow it will be you Sh80. Venezuela is facing a much better prospect than this.

The highest inflation in history was recorded in July 1946 in Hungary. During that period, prices were trebling every day. You buy bread at Sh40 today and tomorrow it will be you Sh120!

Now please don’t ask what the percentage inflation rates were in Zimbabwe and Hungary: those numbers are meaninglessly mindboggling!