Travel to Argentina and Germany to learn about the push and pull of inflation : The Indicator from Planet Money Argentines party hard in the bustling bars of Buenos Aires, despite the stubborn cloud of inflation. Across the pond, German companies switch gears in response to high gas prices, as Russia shuts off its supply. Today on the show, the push and pull of inflation.

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The push and pull of inflation

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Last year, the metaphorical horse of inflation bolted from the stable. In the U.S., inflation is running stubbornly high now. We've got prices rising 8.3% over the last year, according to the latest Consumer Price Index, the CPI numbers out today.


And the honest truth is nobody really knows exactly why inflation surged so much over the last year. Like, how much was due to government spending? How much was due to supply chain disruptions from the pandemic and the war in Ukraine? It is totally not clear.

WOODS: So we at THE INDICATOR thought we would visit two countries where inflation is high for two very different reasons. In one, entrenched government spending has led to an inflation-fearing mindset that has lasted across generations. In another, inflation is driven by one clear cause - the shut-off of natural gas from Russia. Maybe you guessed it. We're going to Argentina and Germany.



WONG: And I'm Wailin Wong. Today on the show, what we can learn about inflation from the bustling bars of Buenos Aires and the shock gas shut-off in Germany.

WOODS: To better understand inflation, it can help to know a term called demand-pull inflation. This is part of what's happening in the U.S. We've been buying lots of stuff. That pulls up demand, and it pulls up prices, too. And an extreme version of this is happening right now in Argentina.

WONG: And in Argentina, its inflation predates the pandemic and is driven by government spending. In the early 2000s, an expansion of welfare, public health care and energy subsidies for households drove up the government's deficit. The government pared back a little bit recently, but now it's basically printing money to pay for spending and debt servicing. Inflation is running at 70%.

WOODS: And yet, if you were to walk through the streets of Buenos Aires, you would see the bars and restaurants packed. There'd be people eating asado, grilled beef, and they'd be drinking Argentinean wine like Malbec.


TAMMY RAMIREZ: (Non-English language spoken).

WOODS: A TikTok video about this recently went viral.


RAMIREZ: (Non-English language spoken).

WONG: The TikTokker, Tammy Ramirez (ph), is saying that the clubs are full, and people are buying champagne and tables that cost a fortune.


RAMIREZ: (Non-English language spoken).

WONG: She's saying, none of our spending makes any sense.

BERNARDO DIAZ DE ASTARLOA: We basically don't think about the future, and we live in the present. And I think that's very weird.

WOODS: Bernardo Diaz de Astarloa is an economist in Argentina. He's paraphrasing the TikTok video here, and he thought that the TikTok raised an important question. So he worked with some friends to make a response video to explain this paradox.


UNIDENTIFIED PERSON: (Non-English language spoken).

DIAZ DE ASTARLOA: We kind of made a video to reply to that and say, you know, why people think this way. And we kind of explain this about inflation, and that kind of went viral as well.


UNIDENTIFIED PERSON: (Non-English language spoken).

WONG: Bernardo says Argentines spend for today because of inflation. The interest rates you get at the bank are well below inflation. So by saving, you're losing money each year. So you may as well spend it fast.

DIAZ DE ASTARLOA: I think it really captured, like, what people think. I mean, of course it's very aligned with theory because that's exactly what you would expect that will happen when people just consume now instead of tomorrow.

WOODS: Ironically, this spending drives up inflation even further, and Bernardo says it causes other problems.

DIAZ DE ASTARLOA: It's something very bad for investment because then the financial sector is kind of not well funded. And that's something very structural of Argentina, you know, this inability to develop a long-term financial sector or a mortgage market, for instance. So it's very hard in Argentina to get credit to buy a house.

WONG: With less savings in the system and interest rates that might be overwhelmed by inflation, banks are wary to lend money to people to buy houses or build businesses.

WOODS: The spiking cost of living has helped to tip about an extra 1 in 10 Argentines into poverty over the last several years. Argentina now has a 37% poverty rate. Argentina has been through so many booms and busts in the past that an inflation mindset has really embedded itself among Argentines. And so for those lucky enough not to be living on the edge, they've basically got two options - either hold black market U.S. dollars underneath the mattress...

WONG: ...Or spend it fast - asado and champagne.

WOODS: I mean - Argentina, living in the moment - maybe that's what the tagline should be.

DIAZ DE ASTARLOA: Just living in the moment - yeah, that's right. Yeah, yeah.

WOODS: Yeah.

DIAZ DE ASTARLOA: That's absolutely right.

WONG: So that's Argentina - demand-pull inflation. And the other main way to think about causes of inflation is cost-push inflation. We've seen that in the U.S., too. This is the kind of inflation we've associated with supply chain disruptions during the pandemic and war in Ukraine. And one big economy especially feeling the pinch is Germany. Ben Moll is a professor of economics at the London School of Economics.

BEN MOLL: Germany, before the war in Ukraine, imported 55% of all its gas use - so more than half - from Russia. So that's why, you know, people were concerned about this. It just is a huge number.

WOODS: When Russia invaded Ukraine earlier this year, one of the biggest questions was whether Germany could stomach shutting off its Russian gas supplies, either through its own sanctions or from Russia shutting them off for them. One of the big fears here was cost-push inflation.

WONG: German Chancellor Olaf Scholz spoke to the German Bundestag in March with a grim prognosis if Russian gas were to be shut off.


OLAF SCHOLZ: (Speaking German).

WONG: Olaf Scholz said hundreds of thousands of jobs would be lost, and entire industries would be pushed to the brink. So Ben wanted to test this. He got together with some researchers and modelled what the effects of a Russian gas shut-off would be.

WOODS: And Ben and his team's results definitely showed a dent to the economy but, like, a .5% or a 3% drop in GDP. So painful for sure, but not wildly different than, say, the economic cost of the recent COVID recession.

MOLL: It doesn't necessarily imply economic Armageddon. And the reason for this is that producers can substitute for gas and other inputs along this production chain along the way.

WONG: This is called the substitution effect, and it's a core principle of economics. When the price of something rises, businesses and people will substitute to less expensive alternatives. All of these tiny decisions across the economy can add up to minimize overall damage from a price spike in gas. And it means that inflation doesn't rise as much as it would otherwise.

WOODS: But not everybody was convinced by Ben's paper. The German chancellor rejected this kind of analysis on national TV in March.


SCHOLZ: (Speaking German).

MOLL: Basically, he called us irresponsible, and he said that it's irresponsible to calculate around with some mathematical models, is I think the quote.

WOODS: Oh, wow.

MOLL: It was, I mean, sort of a disbelief at first. But then I guess you also have to realize the guy's a politician. He's trying to defend, you know, his course of action.

WOODS: But the econ nerds had their revenge, or at least it seems like that at the moment. In the months that followed the interview, businesses have been substituting away from gas dependence. And not a moment too soon because Russia turned off the major gas pipeline two weeks ago.

WONG: So now a manufacturer of screws is turning its gas furnaces to electric. A major brewery is converting its boilers from gas to oil. Also, homes are buying electric heat pumps for the winter. Berlin, it's switching from gas lights to LED.

WOODS: And if converting to other energy sources is too hard, well, industries can import inputs from other countries. Like, take fertilizer - German companies are now importing cheaper fertilizer from the U.S., and that keeps farms productive in Germany. Supermarkets can stay stocked. So it appears like Ben's thesis about substitution effects is standing up in Germany.

WONG: And in the U.S., you can see the substitution effect, too. Faced with global chip shortages, car manufacturers have changed their designs to be less reliant on certain processors. And because of rising meat prices, people have altered their eating habits. As the Fed lists interest rates, consumer spending growth is also slowing down. And the hope is with these actions, both demand-pull and cost-push pressures will ease.


WOODS: This episode was produced by Nicky Ouellet with engineering from Robert Rodriguez. It was fact-checked by Kathryn Yang. Viet Le is our senior producer. And Kate Concannon edits the show. THE INDICATOR is a production of NPR.

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