for much For the past two years, economists have argued heatedly about prices. As inflation in America and elsewhere has exceeded central bank targets, analysts have analyzed various components of the cost of living, including prices for goods, services, energy and rent.
But what about the BigMac? The iconic McDonald’s burger is a mix of rent, power and labor, plus beef, bread and cheese. Its price therefore points to broader inflationary pressures. And since the burger is basically the same everywhere in the world, its price can also show how inflation has changed the relative costs of different countries.
In America, for example, the median price of a Big Mac has increased by more than 6% over the past two years to an average of $5.36. (Price tends to be slightly higher in big cities.) According to purchasing power parity theory, if prices rise, a country’s currency should fall, all else being equal. This prevents the country’s prices from deviating too far from those in other parts of the world.
Still, the dollar has risen, not fallen, against the currencies of most other major economies over the past two years. A trade-weighted exchange rate index released by the US Federal Reserve rose more than 9% from December 2020 to December 2022. One reason is that inflation has also returned in many of America’s trading partners. In fact, in many places it is even worse. Big Mac prices have risen 14% in the eurozone and 15% in the UK over the past two years. But the dollar’s rise against the euro and pound was more than needed to offset this inflation gap.
The combination of rising prices and a rising currency threatens to throw American prices off balance with those elsewhere in the world. For example, two years ago the Big Mac was 26% cheaper in Japan than in America. Essentially, this suggests that the yen was undervalued and should have appreciated against the dollar. In fact, the opposite has happened. A Big Mac is now more than 40% cheaper in Japan.
There are exceptions where the theory of purchasing power parity applies. Although the Argentine peso has fallen against the dollar, prices in the country have risen even faster. A Big Mac now costs the equivalent of $5.31. This is high compared to the price two years ago and also compared to today’s price in Brazil ($4.44). If the two Latin American countries were to form a currency union at today’s exchange rate, Argentina would be at a significant competitive disadvantage. It would be almost 20% more expensive than its larger neighbor, at least when measured by burger prices.
The economist The company has been making comparisons of this kind since 1986. Converting Big Mac prices to dollars consistently shows large price differences for the same burger in different countries. A measure of a currency’s “fair value” is the exchange rate that would fill these gaps. But of course exchange rates are not the only thing that can adjust. Prices can also rise faster in one country than another. In the long era of low inflation, this was not where the action took place. In the last two years, prices have moved in many countries. Unfortunately, these inflationary surges have done little to bring burger prices closer together. ■
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