Yet, it points to questions about the validity of the CPI. We all consume many more things other than Big Macs. Is the Big Mac representative of prices across the economy? But the overall conclusions remain the same. In this case, the difference is a little less severe i.e. You can see this chart tells us a similar story. This is the predicted price of the Big Mac when I apply the rate of US CPI to the original price starting from 1986. I have also plotted another line in lighter blue called “CPI Calculated Price”. The price of a Big Mac has risen from $1.60 in 1986 to $5.65 today. This is labelled “Actual Price” and represented by the dark blue line. In the chart below, I’ve plotted the historic price of the Big Mac in the United States (US) over time. How has the price of the Big Mac changed over time? It thus allows me to compare the actual prices to those inferred with the historic CPI rate. The reason the Big Mac Index is useful for this article is it gives me the historic prices for the Big Mac since 1986. If you want to know more about it, The Economist has a great site and you can access their data sets. So, at any point, by comparing the actual prices of the Big Mac we can determine if a currency is under or over-valued relative to another. The idea is that over time exchange rates should normalise so that things cost the same amount. In other words, how much “bang for your buck” do you get between countries. They created the index as a light-hearted way of comparing purchasing power parity between countries. If you have not heard of it before, the Big Mac Index is a concept invented by The Economist magazine back in 1986. It takes many factors like meat, dairy, vegetables, labour and property to produce a Big Mac.īut the primary reason I chose the Big Mac is I was able to get the historic prices from the Economist’s Big Mac Index. It has wide consumption across the population (and globe).

Well in part because it is a stable product that doesn’t change over time. Why the Big Mac and what is the Big Mac Index? To inform this debate, I looked at the historic prices of the Big Mac over time and compared them to CPI. Has inflation actually been higher than CPI would suggest? There are many who think this is the case. Yet, the question I wanted to explore is this. Consensus is gathering that inflation is not “transitory” and is in fact structural.

The latest print on the US Consumer Price Index (CPI) was 6.2%. And rightly so.Īfter decades of a ‘low’ inflationary environment, headline numbers are picking up. Inflation has become a hot topic recently.

Big mac index example