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Falling Gas Prices Fuel Consumers to Spend More

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Binyamin Appelbaum: “When gas prices fall, Americans reliably do two things that don’t make much sense.” “They spend more of the windfall on gasoline than they would if the money came from somewhere else. And they don’t just buy more gasoline. They switch from regular gas to high-octane.” “A new report by the JPMorgan Chase Institute, looking at the impact of lower gas prices on consumer spending, finds the same pattern as earlier studies. The average American would have saved about $41 a month last winter by buying the same gallons and grades. Instead, Americans took home roughly $22 a month. People, in other words, used almost half of the windfall to buy more and fancier gas.” “There is, however, a pretty good explanation for this kind of pattern. Researchers have found that people treat money as earmarked for particular kinds of spending, a tendency behavioral economists call ‘mental accounting.’” JP Morgan Chase: “In Figure 21, we show the breakdown of which categories people spent their gas savings on.” Appelbaum: “A government devising a targeted tax cut, for example, would do well to remember that people are likely to spend the savings near the target.”
Topics: wonk-wire