In his book “Misbehaving,” behavioral economist Richard Thaler analyzed a 2011 study by Justine Hastings and Jesse Shapiro which explored the relationship on spending and gas prices. The study found that during the 2008 financial crisis, when gas prices fell 50 percent from $4 a gallon to $2 a gallon, the money that was saved on buying regular gasoline ended up being spent on premium gasoline instead. Instead of pocketing the money in case of an emergency or allocating the extra cash elsewhere, car drivers viewed their decision to upgrade gas as a splurge. 

If households view premium gasoline as a splurge, then gas may be seen as an economic indicator. By definition, an economic indicator is used to predict investment possibilities and assess the economy’s overall health. In the same way that women view cosmetics like lipstick as an affordable splurge during hard times, an increase in buying premium gasoline can be an indicator of an economic fall. 

Gas is a frequent and telling purchase. 85 percent of Americans either drive alone or carpool to work each day, according to American Community Service data, and there are over 115 million cars on the roads each day. 

Although it may seem counterintuitive to be spending more on a higher grade of gasduring a recession, Thaler attributes this seemingly irrational behavior to a concept he termed “mental accounting,” meaning that consumers all have mental spending “buckets” that are largely separate and unchangeable. For example, the study found that a save in filling up a driver’s gas tank did not readily translate to a consumer using the extra money to upgrade their orange juice or milk choices.

Another study conducted by the American Automobile Association found that 16.5 million motorists in the United States purchase premium gas. However, 70 percent of cars driven in the U.S. require only regular gas. The study estimates that purchasing premium gas wasted $2.1 billion in 2016 because motorists perceive premium gas as better for their engines when in reality, it is an unnecessary purchase. Despite the state of the global financial crisis in 2008, spending on premium grade gasoline rose by 14 times the usual amount even more so than normal, according to the Hasting and Shapiro study.

In April of this year, the L.A. Times reported that gas prices rose to over $4 a gallon for the first time in four years. While the price of gas itself may be seen as an economic indicator, the amount of spending on premium grade gasoline can also chart economic changes. When gas prices go down during periods of economic recession, the purchase of premium grade fuel may go up due to its now-affordability as a splurge item, signaling an economic downturn. As gas prices rise, more consumers have forgone splurging on premium and have settled for regular due its lower cost because in their minds, they don’t have any discretionary funds from their gas money “bucket” to pay for better quality fuel. 

Argentina’s inflation rate has risen to as high as 57 percent this year and has stayed at around 55 percent since its peak in May of 2019.

In recent memory, Argentina has been known for two things: Really good homegrown beef and an extremely high inflation rate. Thank god for the high-quality beef, a key trade asset that has kept some value in the economy. However, even the best beef in the world can’t save the economy from an inevitable crash or crisis. Argentina’s inflation rate at the end of 2017 was only 24 percent, still unbearable, but nowhere near as bad as 57 percent. So the question is, what is the reason behind their 30 percentage point spike in inflation and how do we fix it?

Background information on how we got to this point

The Central bank has tried to control the Argentinian inflation rates in the past, but has proven unsuccessful. The Argentinian peso lost almost 51 percent of its value in 2018, and this year has lost 15 more percent of its value compared to the U.S. Dollar. The disesteemed peso has caused an extreme recession in Argentina, where poverty rates have gone up tremendously. The economy contracted 5.8 percent in the first quarter of 2019. This has left foreigners skeptical to invest in the Argentinian peso, but many continued their investments due to confidence in a turnaround. The spike in inflation in 2019 has not only driven most investors to stay away from the Peso, but has also forced banks to ease limits on foreign exchange interventions. The President of Argentina, Mauricio Macri, has been under a lot of pressure to fix the inflation rate or at least make the economy emerge in the right direction. But with election day coming in October, Macri’s chances of being re-elected are diminishing. Macri was elected as a moderate that would be fiscally conservative, a polar opposite to the “free-spending” 2015 president Cristina Fernandez, who originally started the extreme spike in inflation.

The Inflation Spike!

When Macri was elected into office in 2015, he started off with major budget cuts to offset the “free-spending” of Fernandez. Macri was furious with the free public subsidies given to families to get back on their feet from the 1998-2002 Argentine Great Depression that left millions impoverished. He believed that these subsidies caused an extreme spike in inflation and when Macri became elected, he got rid of the subsidies right away. People had relied on many of these subsidies to help provide for their family, and when these were taken away, they were not prepared to pay for things that had previously been taken care of by those subsidies. Once the budget cut kicked in, “Every time a water, electricity, or home heating gas subsidy was reduced, people’s monthly utility bills went up”(PRI.org), which caused consumer spending to go down dramatically. Business’s also had to pay off the utility bills which raised prices on goods and services. The people could not afford the goods and services anymore. The central bank then raised interest rates tremendously, thinking it was a good decision since the safe United States economy among other safe economies were doing it as well. Instead, private investment went down even more, and the recession got worse as inflation skyrocketed.

Lowering the inflation rate and Argentina’s big decision in October!

People put Macri at fault for the whole situation and blame his moderately conservative policies as the leading indicator for the spike in inflation. However, those policies did not spike inflation on their own as Private investors staying away from the devalued peso helped skyrocket inflation as not enough money was coming into the economy. Many are so angry with Macri that they want to venture back to “free-spending” and vote for the ultra-liberal and former president Cristina Fernandez. Citizens believe that Fernandez will at least lower the inflation rates back to 25 percent from 56 percent, since it hovered around there for part of her presidency. However, many of these citizens are uninformed and there are many lurking variables behind the spike in inflation and what caused it. Yes, Macri made the spike in inflation worse with his policies driving investors away, but this crisis could have been avoided if Macri implemented his policies at a slower rate, rather than drastically changing the economy right away which he did. Fernandez will make drastic changes as her free-spending agenda will raise inflation even more, ultimately making Argentina unlivable. Argentina needs a moderate with a fiscal agenda to take over. Macri was not the right fit, but someone who can read economies better than him, use similar fiscal policies, and implement those policies at a slower rate will make the economy better. If the people of Argentina decide to go ultra-liberal with their inflation rates at 56 percent, then an even bigger crisis is inevitable.

Sources:

Main source: https://www.pri.org/stories/2019-05-06/how-argentina-crept-threshold-crisis-again

Source 2: https://tradingeconomics.com/argentina/inflation-cpi

Source 3: https://www.forbes.com/sites/stevehanke/2019/03/16/argentinas-peso-nothing-but-trouble/#1f5a1d262a9a