How Inflation Affects Our Incentives

Behind only Venezuela and Lebanon, Argentina’s inflation is the world’s third highest. So yes, we can say that prices are up 160 percent during the past 12 months.

But the numbers do not convey what really happens.

Argentina’s Inflation

Skyrocketing prices create new incentives. In an inflationary environment, it no longer makes sense to save because of your sinking spending power. Or as one worker said, “As soon as I get my paycheck, I go buy everything I can,” Furthermore, shoppers rush to supermarkets when they open in the morning. The goal is to grab items before their daily price increases. Also, as one woman described, “Last time I went to the butcher, I saw people buying just a quarter (kg) (0.55 pounds) of ground beef or chicken breast. I’ve never seen that,” Then, at the same time, governments cannot resist price caps. As a result, they create shortages that exacerbate their problems.

Argentina has been fighting high inflation for more than 50 years. From 1960 to 2017, major monetary events included hyperinflations in 1975, 1985, and 1989. Always, economists have blamed their problems on government spending that they could not afford.

Now though, a new president’s inflation fighting promises are making it worse before things (hopefully) get better. With prices rising at a faster rate, a wine bar owner said that beef was up 73 percent in just two weeks. At the same time, popping from 6,500 to 15,600 pesos for a five-kilogram box, his zucchini cost him 140 percent more. Similarly, parents of toddlers saw the price of diapers double during one month and gasoline was up 60 percent.

Their new president, Javier Milei, says he will spend much less and subsidize only the poorest households.

Our Bottom Line: Six Facts About Hyperinflation

Johns Hopkins Professor Steve Hanke tells us that to be called hyperinflation, we have to have an inflation rate “…exceeding 50 percent per month for at least 30 consecutive days.” For that reason, I am not sure if Argentina is now experiencing a hyperinflation. But still, let’s look more closely at what hyperinflation has meant in places that range from 1920s Germany (a 29,500 percent rate) to 1946 Hungary (207 percent daily) to 2008 Zimbabwe (98 percent daily).

1. To understand hyperinflation, PPP can come in handy.

PPP (purchasing power parity) tells us how much two currencies can buy of the same item. It lets us compare purchasing power. Returning to zucchini, its monthly price rose from 6500 pesos to 15,600. We just need to know that each of those peso prices could be converted to the same (hypothetical) dollar amount. You can see that you need lots more pesos but the same dollar for your salads.

2. It helps also to know the minimum wage.

Agonizing over soaring prices, typical wage earners fall farther behind. In Venezuela, for example, the price of eggs rose from 2,800 bolivars one month to 9,800 the next month. People earning a minimum wage of 34,000 bolivars a month needed a hefty part of it for their breakfast.

3. Perhaps though price stickers say the most.

Stuck in the middle of all of this, shopkeepers have price tags to think about. They have to decide how frequently to change what they charge. The decision involves chaotic bookkeeping. And, whatever they do, their customers will rush in to beat an increase if they know when the change is scheduled.

4. The number to remember for hyperinflation is 50%.

If, during 30 consecutive days, prices rise by more than 50%, you have hyperinflation. Furthermore, when the increase stops for a month or two and then begins again (within a year), you are in the midst of the same hyperinflation.

5. You cannot forecast hyperinflation.

Although the IMF has said Venezuela’s hyperinflation will equal 2,500,000%, the experts say it just cannot be predicted. The politics, the distortions, and the rapid up and down changes make its trajectory unknowable.

6. You cannot tether an out-of-control currency.

Venezuela has tried raising the minimum wage, printing more money, and price controls–all to control the upward march of prices. None of it worked. The alternative is dump and replace. As Argentina has said is a possibility, you dump your currency and replace it with the dollar.

Otherwise, as shown in our featured image, a bakery has to weigh the money used for each purchase.

My sources and more: The NY Times and Reuters had the details of everyday life for Argentina’s inflation while BusinessInsider offered the solution and this paper had the history. Meanhile, I started at Yahoo Finance (and wound up at InsiderMonkey) to get recent inflation rates. But then, most crucially, we needed Johns Hopkins professor Steve Hanke’s hyperinflation definition.and his list that we copied from a past econlife post.