Burgernomics – A bitter taste of inflation
The Big Mac Index was invented by The Economist back in 1986 as a “Guide to Inflation for Dummies” nineteen years following the creation of the Big Mac in 1967 and priced at 45c at the time. (today it will cost just over $6 – up 1,244%). This was exactly ten years after McDonalds had inaugurated its first franchise in Switzerland (in Geneva on November 4th, 1976 – at the time the Big Mac was priced at CHF 3.90 and now worth CHF 6.90). The index was intended to be a cheerful way of illustrating the concept of purchasing power parity together with inflation in the price of a universally recognized iconic burger synonymous with American culture and using the same ingredients globally. Local variants like the McRaclette (forget the processed Cheddar) or the McBollywood (without the beef please) were the rare exceptions. Needless to say, that anything that has to be fried, baked or cooked has seen its priced jacked up by a significant amount in the last 12 months.
On a less brighter note, one can only witness the spectacular rise and fall of purchasing power in the US (watch this space for the next big revolution to come!). In 1980 minimum wage in the US could buy you just over 6 Big Macs whereas in 2022 it could barely buy you one (don’t forget state and city taxes)!
| 1967 | 1980 | 2023 | |
| Minimum Wage | $1.40 | $3.10 | $7.25 |
| Big Mac Avg. Price | $0.45 | $0.50 | $6.05 |
| Big Macs per hour | 3.10 | 6.20 | 1.20 |
How McDonalds was able to distribute their equivalent of the mass-produced Ford Model T (an identical product range across the globe) so successfully still baffles me. And no, the best burgers are not necessarily found in America (you would be surprised!). Why one would buy something that has more sugar, fat, salt and saturated fatty acids than carbohydrates is a mystery to me, but it has survived the test of time and put many peers out of business since its creation in 1955 in California (ironically the state that has become one of the healthiest and fittest state in America). As the world’s top selling fast food group and most successful restaurant group, it became a Harvard Business School case study 20 years ago and survived the recent pandemic unscathed, thanks to its McDrive® drive-ins, social distancing oblige. Since it’s IPO on April 21st 1965, a single share bought at $22.50 would be now worth a whopping $1,201,625 (excluding dividends but taking to account stock splits)!
Besides its entertainment value, The Big Mac index does have its flaws; most of the African continent is off the menu and Russia is also off the menu since last year as is Belarus (for supply chain issues – scarcity of French fries). GDP growth and labor costs differ across the world (often reflecting the local minimum wage) and one item is not reflective of your typical consumer basket that represents the cost of living. However, it does reflect the price of raw materials, cost of labor and electricity. There is also a GDP adjusted version of the chart which changes the stats somewhat.
Being outside the Euro area appears to have its advantages with the likes of Switzerland, Norway and Sweden consistently on top of the rankings. However, the latest rankings show that Turkey, Egypt and even Britain have fallen precipitously in the rankings since last June only to be beaten downwards by the likes of Venezuela (that once topped the charts beating both Norway and Switzerland back in 2013!). The common denominator is inflation that hit these countries more significantly (Venezuela actually imports most of the food they eat) prompting their central banks to tighten more aggressively.
Buy your Big Mac in Bitcoin in some places around the world like El Salvador (and even some cities in Switzerland) and your price volatility goes off the charts! And if you thought there was no inflation in Japan, McDonalds has hiked the price of the classic burger three times in less than a year (+55%) on surging costs and currency fluctuations as inflation has just hit its highest level in forty years! Ironically as food prices rise, wining & dining out will be on the decline benefitting McDonalds.
Stay tuned for the next release of the Big Mac Index in six months and be prepared for more sticker shock! McDonalds just reported its Q4 earnings which beat expectations on both the top and bottom lines despite the strength of the US dollar (the group generates more revenue outside the US so watch the fall in the USD since the end of last year which would improve the numbers for the next quarter). Double-digit sales growth in all segments is not bad in today’s environment when you have some pricing power.
With bottlenecks in supply chains abundant throughout the world thanks to the war in Ukraine and La Niña (the opposite effect of El Niño) doing a rare triple dip (for the third year in a row) and affecting crops across the globe through extreme drought, rainfall and hurricanes, one can expect things to get worse. All this creates one of the greatest opportunity sets in a lifetime for discretionary macro and arbitrage managers in addition to the end of the prolonged zero interest rate environment as rates normalize.
If only one could arbitrage the spread of a Big Mac…!
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