I learned about the Big Mac Inflation Indicator about 6 years ago from Dunn Warren Financial Advisors. For me, it remains the best overall indication of what the real inflation rate is—in the US and worldwide. Below is a blog posted by James Cornehlsen on June 22, 2014 about this index. I have copied and tweaked his article for the benefit of my readers:
The Consumer Price Index (CPI) in June increased 1.8%. This increase was driven by the escalation of oil prices. However, this rate of increase is slower than what consumers are experiencing..
Continuing our research into using the Big Mac as a gauge of inflation, we build on past posts but use our own research to draw conclusions. In previous articles, we have relied solely on The Economist’s calculation of the Big Mac price. The Economist has been conducting the research sporadically since 1986. However, it was not until a few years ago that they began regular updates to their research in both January and July. Believing this span is too great, we have compiled our own look at the price of the Big Mac in the United States. Thanks to my assistant Geraldine Garcia, we have surveyed 30 McDonald’s restaurants throughout the nation to obtain the average price and compare that to the trend.
From our research, we have determined that the average price of a Big Mac is $4.57 (the range was $3.91 to $5.57), an increase of $0.12, or an increase in 2.7% from what we obtained in March. During the last 12 months, this represents an increase of 4.3% from 12 months ago when the price of a Big Mac was $4.38.
As stated in previous posts, I believe that the Big Mac provides a better indication of price movements than the government compiled CPI. Many of us can neither follow nor actually experience what the CPI means or how it moves. Conversely, the Big Mac is consumed constantly, and we shell out hard-earned dollars to purchase the sandwich. Thus, it is a real-time metric of our economy. Plus, the Big Mac represents multiple segments of our economy—grains, meat, vegetables, labor, transportation, etc.
The Consumer Price Index (CPI) was reported to have increased 1.8% during the past 12 months. The Big Mac increased significantly more. This under-reporting of inflation impacts savers, investors, retirees, and those who receive Social Security, just to name a few
Placed Insights surveyed the eating habits of Americans to determine that individuals eat 17 Big Macs a second. This means Big Macs are eaten at a rate of 1,200 a minute, 61,200 an hour, 1,468,800 each day and 536,112,000 a year. At $4.57, the current average price of a Big Mac generated $2.4 billion in revenue for McDonald’s from Big Macs sold in the U.S. alone.
My point is that people experience the change in the price of the Big Mac daily. It is tangible. Consequently, it is a good way to view inflation.
Bet on the Big Mac
The CPI has a longer history to track than the Big Mac. However, CPI has changed over time as the weighting for different components has shifted. So, essentially, the calculation for CPI has changed. However, the formula for the Big Mac hasn’t changed. Which do you believe is more reliable and representative of inflation, the cost of your Big Mac or the government’s CPA? To me it’s crystal clear—go with the Big Mac. Check out the worldwide Big Mac Index at The Economist website: http://www.economist.com/content/big-mac-index. Cornehlsen’s original article may be found at: http://auminabox.com/inflating-the-big-mac/.