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Consequently, each dollar we have is buying a lot less. Today, you would have to cut the Big Mac into three pieces and only eat one of these bites to get your dollars’ worth. In 1986, $1 would have purchased over half of a Big Mac. In the context of these federal policies, the rate of price increases for the Big Mac is almost three times greater than the official Consumer Price Index. This policy shift started with the Asian crisis and Long-Term Capital Management, followed by the Internet bubble, housing bubble, Great Recession, and now the “New Normal” of zero federal funds rates and quantitative easing. More disconcerting is the effect of aggressive adjustment of monetary policy by the Federal Reserve, which began in 1999. During this same time period, the Consumer Price Index has increased at a much lower rate of 116%. Since 1986, the price of a Big Mac has increased by 208% from $1.60 to its current price of $4.93. The reason for this is that it is believed people change their spending habits as prices change, which is why the Bureau of Labor Statistics instituted this policy. Second, there is a “chained” effect, meaning the basket of goods isn’t consistent from one time period to the next. First, CPI accounts for the substitution effect whereby if the price of beef increases, it is assumed that fewer people will buy beef and will instead buy chicken.
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The basket includes food & beverages, housing, apparel, transportation, medical care, recreation, education & communication, and other goods & services.” However, there are two broad concerns with the CPI. On the BLS’s website, CPI is defined as “a measure of the average change over time in the prices paid by consumers for a market basket of consumer goods and services. You could also use this approach to look at the trend of prices for other countries as well.īy graphing the trend of the Big Mac Index each year since 1986, we are shown that prices have accelerated much faster than the official reported Consumer Price Index (CPI) from the Bureau of Labor Statistics.
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Rather than use the Big Mac Index for comparing the value of currencies between countries, we wanted to take the price of the Big Mac each year within the U.S. The Big Mac Index has just one item however, because it contains beef, dairy (cheese), wheat (bun), cost of labor, and the cost of real estate, we believe it is a good representation of prices in the United States and abroad. This adjustment for interest rates makes the price of a Big Mac comparable in each country. This theory looks at the same basket of goods in each country and then adjusts for the interest rate one would pay for a loan or receive with a savings account. The index is based on a theory called purchasing-power parity. It was designed to compare the price of currencies between different countries. The Economist Newspaper created the Big Mac Index in 1986. Using the Big Mac Index to Measure Inflation
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The price hikes represented by this popular burger will impact individuals more than the saturated fat content the Big Mac bears. If we were using the Consumer Price Index (CPI), the price of a Big Mac today would be about $3.80 (see the graph below). As of January 9, 2016, The Economist reports that the average Big Mac now equals $4.93. In 1998, the average price of a Big Mac was about $2.50. The rise in the price of a Big Mac is occurring faster than the official rise in consumer prices and has been this way since the late 90s. This represents a 12-month change of 2.9% and is a representation of typical inflation however, this is certainly greater than the Bureau of Labor Statistics’ measure of inflation. Last week the Consumer Price Index (CPI) was released by the Bureau of Labor Statistics, stating that “over the last 12 months, the all-items index increased 0.7% percent before seasonal adjustments.”Īs an update, the Economist Big Mac price in the U.S. This blog entry has been updated with new data through the end of December 2015. This article was originally posted on October 2013 on AUM in a Box.