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May 4, 2013

The Big Mac Index & The CPI Index

"Since the late 1980's, The Economist Magazine has compiled something called the "Big Mac Index,"(BMI) a global survey of the cost of McDonald's signature hamburger. Although the index is primarily used as a means to compare purchasing power parity around the globe, it also can be used to track the prices of Big Macs in the U.S. over many years.

From 1986 to 2003 the U.S. BMI rose roughly in line with the CPI. Although the burger occasionally rose faster or slower, over that 17 year period both indexes increased by about 68% (or about 4% per year). But from April 2003 to January 2013 the CPI Index is up just 25% percent (from 183.8 to 230.28 or about 2.5% per year) while the BMI is up 61% (from $2.71 to $4.37 or about 6.1% per year), or more than twice the rate of inflation.555 What could possibly account for the difference? Has the Big Mac gotten bigger, better, tastier, or healthier? As an iconic product, McDonald's has been reluctant to change a proven formula. If the Big Mac hasn't changed, is it possible that our inflation yardstick has?

It has been estimated that if the government used the same methodology to measure inflation that it used during the 1980's, we would be currently dealing with official inflation that would be many times higher than today's official 1.5% rate. The Big Mac appears to confirm this." - in Finance Townhall

Peter Schiff`s comments on the economy, stock markets, politics and gold. Schiff is the renowned writer of the bestseller Crash Proof: How to Profit from the Coming Economic Collapse.
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