Some people consider the price of a McDonald’s “Big Mac” to be a reality check for what is happening to consumer prices. Why?
- Fast food is widely consumed, outside “the one percent”. A Big Mac may be a price that real people pay often.
- The price reflects not only food costs, but also costs for hourly labor and benefits, commercial real estate, transportation, energy, manufacturing equipment and packaging.
- Until a few years ago, changes in the price of a Big Mac tracked changes in the government CPI (Consumer Price Index) fairly well.
In recent years, Big Macs have gone up rather more than the CPI. Why? Several different explanations could be put forward. The least likely explanation is that McDonald’s has suddenly become inefficient at making Big Macs.
Another possible explanation is that the government keeps toying with how it calculates CPI, looking for ways to understate consumer price inflation. That is, to hide it. Which is in the government’s direct, financial interest: that way, the government can make smaller inflation adjustments to Social Security, income tax brackets, inflation-indexed bonds, etc. Plus the political optics are better.
Courtesy of Forbes, Big Mac Index Shows Official CPI Underreports Inflation:
What is the graph saying?
- In 1996, the average Big Mac cost $2.36.
- Going by the government CPI (and assuming Big Macs are still a good reality check), the average Big Mac in 2013 should have cost $3.49.
- But it really cost $4.33, which is a lot more. (The price virtually doubled in 17 years; and of the increase, nearly half is “unexpected” by the CPI.)
- The increase started in the early Naughties, but more of it is recent, in the last six years.
So, whom do you believe? Our noble government which always looks out for you? Or your lyin’ eyes, when you go to buy a Big Mac?
I believe my eyes. I’m more likely to to hit Starbucks or In-N-Out Burger than McDonald’s; but in all 3 cases, I’m always a little shocked at how their prices have gone up from 10, 5 or even just 1-2 years ago. Poor people, who may eat at fast-food restaurants often, must really feel it.
Bonus question: Why would things have changed in the last six years? Who has been in charge of the government – that is, both the CPI calculation, and our general economic policies?