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What Inflation Means for the Big Mac Index

for a lot Over the past two years, economists have raged over prices. As inflation in the U.S. and elsewhere has exceeded central bank targets, analysts dissect the different components of the cost of living, including prices for goods, services, energy and rent.

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But what about the Big Mac? The iconic McDonald’s burger is a mixture of rent, electricity and labor along with beef, bun and cheese. As such, its price is indicative of broader inflationary pressures. And because the burger is basically the same no matter where you are, its price can also reveal how inflation changes relative costs in different countries.

In the US, for example, the average price of a Big Mac has risen more than 6% over the past two years, to an average of $5.36. (Prices in larger cities tend to be a little higher.) According to the theory of purchasing power parity, when a country’s prices rise, that country’s currency should fall, all else being equal. This prevents prices in the country from differing too much from those in the rest of the world.

However, over the past two years, the dollar has been rising, not falling, against the currencies of most other large economies. The trade-weighted exchange rate index published by the US Federal Reserve increased by more than 9% from December 2020 to December 2022. One reason for this is that inflation is also returning to many of America’s trading partners. In fact, it’s worse in many places. The price of a Big Mac has risen 14% in the euro zone and 15% in the UK over the past two years. But the dollar has appreciated far more against the euro and sterling than is needed to offset this inflation gap.

The combination of rising prices and a stronger currency could disconnect prices in the U.S. from those in the rest of the world. For example, a Big Mac was 26% cheaper in Japan two years ago than in the United States. In principle, this suggests that the yen is undervalued and should have appreciated against the dollar. In fact, quite the opposite. Big Macs are now over 40% cheaper in Japan.

There are exceptions where purchasing power parity holds true. While the Argentine peso has fallen against the dollar, prices in the country have risen faster. A Big Mac now costs the equivalent of $5.31. That’s higher than the price two years ago, and higher than the price in Brazil ($4.44) today. Should the two Latin American countries form a currency union at today’s exchange rates, Argentina would find itself at a huge competitive disadvantage. It’s nearly 20% more expensive than its bigger neighbor, at least in terms of burger prices.

economist Such comparisons have been conducted since 1986. Converting Big Mac prices into dollars always reveals huge differences in the cost of the same burger in different countries. The measure of a currency’s “fair value” is the exchange rate that eliminates these gaps. But, of course, the exchange rate isn’t the only factor that can be adjusted. Prices in one country may also rise faster than in another. In an era of prolonged low inflation, this is not where the action is. Prices have been rising in many countries over the past two years. Unfortunately, those inflations haven’t brought burger prices any closer.

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