Inflation is Far Worse Than You Think, Especially If You are Poor – A Look at the Big Mac Indicator
Have you ever wondered why the official inflation numbers never seem to jive with your own personal experience in the US? For the most part, the media has dutifully reported the sometimes nonsensical Consumer Price Index (CPI) data as if it were scripture from the Bureau of Labor Statistics (BLS). The CPI is determined by comparing the price differences of a fixed “basket of goods and services” spanning two different periods. Many are scratching their heads to understand why the government and the Federal Reserve (Fed) keep saying there is no inflation, and yet we see prices going up all the time.
So is the BLS lying? No, the BLS is not necessarily lying. They merely are reporting inflation statistics as directed. The CPI has evolved over the years in terms of the formulas they use. The point is that inflation rates are different for various groups of people. For example, if one owns their home (fixed) vs. renting (variable), the homeowner can hedge their residential living inflation, representing about 33% of an individual’s cost to live. Hence the CPI is a blended rate for all these various groups.
The obvious inference is that “street inflation” (the prices the poorer and young people pay) is much higher than we are lead to believe. There have been many attempts to try to explain this. One way to explain this is by using what is called the Big Mac Index. The Big Mac is often used, as it too is a “basket of goods and services” because it includes in its production; food, labor, real estate, management, legal, sales, marketing, interest costs, transportation, utilities, and technology. The Big Mac index is a survey created by The Economist magazine in 1986 to measure purchasing power parity between nations, using the price of a McDonald’s Big Mac as the benchmark. Here is some data when looking at currency variations between countries relative to the cost of a Big Mac.:
But this data is all fine if you’re a currency trader, but doesn’t really help the poor in their understandings of their “street inflation” they must pay. The Fed has a dual mandate of price stability (inflation) and employment. Hence their policy decisions will largely be based on inflation numbers. Which inflation numbers will the Fed use? The more interesting data point is the CPI vs. The Big Mac Index. See here this comparison over a recent historical perspective.
The green line shows how much a Big Mac should cost if one uses the inflation-adjusted CPI formula provided by the BLS. The blue line indicates the actual price at the store – “street-level” inflation. Here are the key takeaways from this data:
- From the year 2000 to 2018, the Big Mac’s CPI price increase should have been about 66%.
- From the year 2000 to 2018, the Big Mac’s actual price increase was about 240%.
- The trend is growing exponentially.
Now let’s juxtapose this “street-inflation” for things one buys with wages. See the following chart over the same 2000 to 2018 period.
When looking at this data set, we can see that real median wages have gone up about 50% from the same years between 2000 and 2018 – somewhat in line with the Big Mac’s CPI-adjusted price inflation, but not for the actual prices paid in the store. One can quickly see computing an accurate CPI is not so easy – it depends on which groups one considers. For the bottom 40% of the social-economic classes, real unadjusted inflation wages are only about 0 to 30% higher, while things they buy even using the government CPI formulas are 66% higher. The actual “street-level” inflation can be significantly higher – by nearly three times for certain products like the Big Mac (240%). However, for example, other products, perhaps less so (from 2000 to 2020); rent 84% (even higher depending on the location), food 54%, Clothing 0%, Auto 20%, Education 160%, and Health Insurance 84%. See here actual prices paid for these products in the grocery store:
In 2002 the price at the grocery store paid:
- Milk: $2.78 per gallon
- Eggs: 96¢ per dozen
- Bread: 92¢
- Ground beef: $2 per pound
In 2018 the cost of the same items:
- Milk: $2.90 per gallon
- Eggs: $1.54 per dozen
- Bread: $1.99 for a loaf
- Ground beef: $6.29 per pound
The Big Mac has been a poor value in terms of inflation when compared to many other products. In general, if the product being purchased has considerable marketing, processing, and packaging and has an inability to offshore the labor content, it has had higher inflation rates. If, on an individual basis, you want to reduce your “street-level” inflation, buy products that do not have these components. In any case, the lower (40%) social-economic classes have had a real standard of living loss of 20 to 60% over the last 20 years – often the poor and young. No wonder they are frustrated.
What could the Fed do to stop this “street-level” inflation – raise interest rates? The Fed could, but then think of unemployment issues that would arise. The Fed is stuck in a no-win situation. So the Fed extends and pretends with ever-increasing monetary expansion, which is just additional currency debasement and inflation for the poor. For the rich, their assets just keep going up. The wealth inequality expands further – and it is growing exponentially. As well, the government deficit spends additionally adds to this currency debasement. This currency debasement will only exacerbate the problem.
Regardless of your view of envy politics of the Left, it is real, and it sells. Wealth inequality does matter as it is the fuel that enables Marxism – see here (Is the Federal Reserve Sowing Seeds of Marxism?). Clearly, something is wrong. So what do we tell the poor? Have the poor just been slacking off? Are the rich that much more productive? Do the poor just need to take a little more personal responsibility? Do they just need to pull themselves up by their bootstraps?
Or … has the system robbed them?
Will anyone listen to “sound money,” “real free trade,” or “balanced budget” policies to actually help the poor, systematically, in this highly charged political environment?
Perhaps it does not matter to answer these questions. Revolution is in the air – it may be all but certain now. Many elites are trying to make the revolution about race, not them – with the Black Live Matter protest/riots. Revolution means war – perhaps we are already in a war. And it is global. Prepare accordingly.
