What inflation means for the Big Mac index – The Economist

by | Jan 26, 2023 | Financial

For much of the past two years, economists have argued fiercely about prices. As inflation in America and elsewhere has exceeded central-bank targets, analysts have dissected different components of the cost of living, including the prices of goods, services, energy and rents. But what about the Big Mac? The iconic McDonald’s burger is an amalgam of rent, electricity and labour, as well as beef, bread and cheese. Its price is therefore indicative of broader inflationary pressures. And because the burger is basically the same wherever you are in the world, its price can also reveal how inflation has changed the relative costliness of different countries. In America, for example, the median price of a Big Mac has risen by more than 6% to an average of $5.36 in the past two years. (The price tends to be a bit higher in big cities.) According to the theory of purchasing-power parity, when a country’s prices rise, its currency should fall, everything else equal. This stops the country’s prices moving too far out of line with those elsewhere in the world. Yet the dollar has risen, not fallen, over the past two years against the currencies of most other big economies. A trade-weighted exchange-rate index published by America’s Federal Reserve increased by more than 9% from December 2020 to December 2022. One reason for this is that inflation has also returned to lots of America’s trading partners. Indeed, in many places it is worse. Big Mac prices have risen by 14% over the past two years in the euro area and by 15% in Britain. …

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