Blue Point Trading - The Big Mac Index and the inflation story

The Big Mac Index and the inflation story. The Big Mac Index was introduced in the Economist magazine, in September 1986, as a semi-humorous illustration of what inflation is doing, especially at street level for average consumers. The Big Mac is a good indicator because it represents a large swath of the economy; labor, real-estate, commodities, retail, logistics, advertising and taxes, for example. Looking at the thumbnail chart, I have taken the last 13 years (2000 to 2013) of the price of a Big Mac and juxtaposed this with median wages in the US and the government issued CPI (Consumer Price Index). First lets look at some facts and then draw some analysis from this.

[li]The Big Mac has risen by 73%, from $2.50 to $4.33.
[/li][li]Median wages have risen by 20%, using a base rate of the Big Mac.
[/li][li]The government CPI says prices have risen by 40%, in this same. Twice the rate as wages, but just under half the rate of the real Big Mac inflation rate.
For sure one may argue that the Big Mac inflation rate is not the real inflation rate for the entire economy, but for the average person, this is what they see, and we can draw some conclusions on what this means for the broader economy. Prices for what the median person pays for goods in the US, is rising about 3.5 times faster than their wages. This shows that people’s standard of living is in fact going down. The other reality is that this divergence of prices to wages, is accelerating over time. Obviously this can not continue forever, as at some point even a Big Mac will be too expensive for most Americans.

In terms of the government’s CPI, it is not necessarily dishonest, they are just calculating inflation on a much broader view, though little comfort for average people. For the average person, inflation is real, but the Fed is not concerned about these folks.

Here is the take away on this Blog post. The standard of living is declining for most Americans, through the magic of inflation, engineered by the Fed, supposedly trying to help Americans via their easy money policy with jobs. It’s not working – leverage is the enemy of the poor.

Furthermore, this trend is accelerating, and as the American market potential declines, it will begin to impact earnings of US equities and hence impact negatively, the inflation adjusted price of the equity market. The accelerating slower growth will keep the risk on trade in check, perhaps event to a point of a major recession to re-balance this problem. The only thing that keeps markets advancing today, is the liquidity from central banks. This will end at some point, signalling a new bear market to come. But of course timing is everything.

Blue Point Trading, William Thompson