What the Big Mac Index Says About Inflation

I was shocked to hear from a friend that a Big Mac in Philly now costs $7. I haven’t kept tabs, being long-past my kids’ Happy Meals days. The Big Mac Index must not be very happy right now. And I hope he meant a Big Mac meal not a mere sandwich.

The Big Mac Index was a cheeky concoction of The Economist as an exercise in figuring out purchasing power parity between currencies. In its early days, everyone would make a beeline for the China price, and cluck cluck about their cheap currency.

Today it has a much better use: testing the reliability of official inflation figures. I am of course shocked, shocked! to learn that governments fiddle with their figures. As you can see at a glance from their chart, Argentina is the biggest cheater, with the US and China not that far behind:

During the height of the Great Recession, McDonald’s (MCD) was one of the Four Food Groups of the Apocalypse, along with Campbell’s Soup (CPB), Hershey’s (HSY) Chocolate and Hormel (HRL) Spam. With food costs rising and difficulty pushing through price increases, how are they faring now? They should be a canary on the coal mine of the Great Margin Squeeze.

McDonald’s has made menu changes since 2008, rotating to higher margin food to keep ahead of rising food costs. So far analysts expect the change in product mix to allow McD to maintain flat margins, although just in the past week (after the Q4 earnings release) more analysts have begun lowering earnings than raising. While Mickey D’s has been pushing healthier food, a lot is riding on their re-introduction of the ever-popular and calory-heavy McRibs. Yum!

Oh, and I did stop by a local McD’s. Out here in the Left Coast, a Big Mac is only $2.99 and the meal $5.19. I don’t suppose that is a dime or two more than it has been for a while. No rampant inflation here.

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About Duncan Davidson 228 Articles

Affiliation: NetService Ventures

Duncan is an advisor to NetService Ventures, where he focuses on digital media and the mobile Internet.

Previously he was at four start-ups: Xumii, a mobile social service based on a Social Addressbook; SkyPilot Networks, the performance leader of wireless mesh systems for last-mile access, where he was the founding CEO; Covad Communications (Amex: DVW, $9B market cap at the peak), the leading independent DSL access provider, where he was the founding Chairman; InterTrust Technologies ($9B market cap at the peak), the pioneer in digital rights management technologies, now owned by Sony and Philips, where he was SVP Business Development and the pitchman for the IPO.

Before these ventures, Duncan was a partner at Cambridge Venture Partners, an early-stage venture firm, and managing partner of Gemini McKenna, a joint venture between Regis McKenna's marketing firm and Gemini Consulting, the global management consulting arm of Cap Gemini.

He serves on the board or is an adviser to Aggregate Knowledge (content discovery), Livescribe (digital pen), AllVoices (citizen journalism), Xumii (mobile social addressbook), Verismo (Internet settop box), and Widevine (DRM for IPTV).

Visit: Duncan Davidson's Blogs

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