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The McFlation index
Lies, flame-grilled lies and statistics
What do burger prices tell us about the reliability of official inflation figures?
http://www.economist.com/node/18014576?story_id=18014576 INFLATION is creeping up around the globe. But in many countries, ordinary folk as well as investment analysts suspect that governments are fiddling the figures for political reasons, and that the true inflation rate is much higher than officially reported. Argentina’s inflation rate is the hardest to swallow. According to the government, consumer prices rose by 10.9% in the year to December, but private-sector economists estimate the true increase to be at least twice as much. In China, too, many claim that the government’s figures hugely understate increases in the cost of living.
Economists disagree on the best way to measure consumer-price inflation. How often should the relative weights be changed? How should one take account of quality improvements? One reason why the Chinese may think their cost of living is rising so quickly is that consumers are moving upmarket—for example, from the local dumpling stand to a restaurant. That increases households’ spending, but is not inflation.
If you find the theory of price indices hard to digest, why not rely on simple burgernomics? The Economist’s Big Mac index was devised as a lighthearted gauge to whether currencies are under- or overvalued, but Jonathan Anderson, an economist at UBS, suggests that it can also be used to cross-check official inflation rates. Consisting of food, materials, wages and rent, the McDonald’s Big Mac offers a handy consumer-price basket, whose composition has hardly changed over time.
We have compared prices late last year with those ten years earlier in a selection of countries. For example, the price of a Big Mac in China rose by an annual average of 3.7%, against the reported inflation rate of 2.3%. Is this evidence that the government is underreporting inflation? Not necessarily; the discrepancy is roughly the same as in America (see chart). One might expect burger inflation to exceed overall inflation because food prices have risen faster than other prices. Yet in Russia and Indonesia, Big Mac prices rose by a lot less than the official price index, possibly suggesting that the governments’ figures overstate inflation.
However, burgernomics does support claims that Argentina’s government is cooking the books. The gap between its average annual rate of burger inflation (19%) and its official rate (10%) is far bigger than in any other country. Its government deserves a good grilling.
Economists disagree on the best way to measure consumer-price inflation. How often should the relative weights be changed? How should one take account of quality improvements? One reason why the Chinese may think their cost of living is rising so quickly is that consumers are moving upmarket—for example, from the local dumpling stand to a restaurant. That increases households’ spending, but is not inflation.
If you find the theory of price indices hard to digest, why not rely on simple burgernomics? The Economist’s Big Mac index was devised as a lighthearted gauge to whether currencies are under- or overvalued, but Jonathan Anderson, an economist at UBS, suggests that it can also be used to cross-check official inflation rates. Consisting of food, materials, wages and rent, the McDonald’s Big Mac offers a handy consumer-price basket, whose composition has hardly changed over time.
However, burgernomics does support claims that Argentina’s government is cooking the books. The gap between its average annual rate of burger inflation (19%) and its official rate (10%) is far bigger than in any other country. Its government deserves a good grilling.
8 comments:
It is not a bad measure, but currency valuations can throw it for a loop.
If your currency has strengthened over the time frame (Russian Oil would do that) then if the item is imported, its cost will go down.
Indonesia was hit hard by the Asian currency crises, and their number is likely caused by a recovery from that event. They also are a major commodity exporter to China.
your numbers are way off..... the 'retail' price increased but you are not showing the amount of inflation on the wholesale side. mcdonaldo is eating part of the increase because it cant raise prices...margin squeeze.
so inflation is actually worse than the numbers show...and that is if you believe the BS numbers the gov put out.....how long can the corporations eat this difference?
Hey - but have you compared the cost of the BigMac in Argentina with the rest of the BigMac hamburgers - I'm sure the price of the BigMacs here in Argie are artifially low - check it out!
Just bought a bag of granola, GMO free ect. from an almacen natural. Paid 19 pesos, started buying this product from this store in Oct/Nov for 16 pesos. That's 18.5% inflation in less than 6 months. This is serious, we're talking about 40% annualized. Sure that's a premium product, your GMO Quaker stuff won't inflate so much, but it's begging for a crisis.
Give the man a break. This is the Economist's chart. Not much he could do to change it even if he wanted to. It takes some serious resources to do a chart like this.
Even the economist does not pretend that it is exactly accurate. It is just meant to be a suggestive look at the whole world. To take into account all the local details (which they may not even be aware off) would really require some serious resources.
"It is not a bad measure, but currency valuations can throw it for a loop."
The ingredients are almost always sourced locally as its the most cost effective method. Even if not, the cost is mainly based on what the market can afford and cost other than the material cost. I worked on KFC prices to franchises and the mark-up was 400%; the cost of the goods, even if imported, was only 20% of the sales price.
I work for a very well known international food company. Very much a "household name".
Our profits were down over 20% last year due to commodity price inflation and expected to be hard hit again this year.
We are expecting to raise retail prices signifincantly in 2011 and beyond to cover the rise in ingredients and eneregy.
Even the company agrees this won't be good for consumers but what else can be done? We're already trying major cost cutting (including not hiring) but that only goes so far. I hope I keep my job.
AAAAAAAAAAAAAnnnnnnnnd in other news: Energy and food REMOVED today from the Consumer Price Index by the Labor Department.
Interesting they'd pull that stunt as gas hits $4/gallon. No conspiracy here, nothing to see, move along...
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