Fed says there’s no inflation – what does the Big Mac index say? Devised back in the 1980s, the Big Mac index is a fun way to explain “purchasing-power,” by comparing the prices of hamburgers from year to year as the true measure of inflation. Burgernomics has also provided a good guide for traders to sense Forex miss-pricing, by measuring price differences from country to country. Some economists think the Big Mac index has been surprisingly accurate in predicting long-run movements in CPI and currency exchange rates.
So what has been the CPI (Consumer Price Index) recently and over the past year? As we can see from the latest December’s CPI report it was flat, with core CPI rising only 0.1%. Inflation was tame in 2012: the CPI advanced only 1.7% last year. So this is good news for the Fed. This is why they seem to have no fear with their current easy monetary policy.
And what does the Big Mac Index say? This is a little more complicated. First by looking at the thumbnail chart we see that up until the early 2000s the CPI and the Big Mac Index were largely in sync. Today they are not. Why? Well you guess it, the government has since changed the way they compute the CPI – click here to read an old article on it. A simple calculation says that the Big Mac Index recently is running 77% hotter than the CPI over the past 10ish years. But do people eat Big Macs or CPIs? Needless to say CPI is very strange and controversial. But what’s is even more strange is, the Fed is basing their policies on these controversial numbers. We are in trouble.
Oh, one last thing, according to this country comparison Big Mac chart, the EUR, CHF, AUD, CAD and NOK are shorts, GBP is a buy and JPY is now back to parity with the dollar. For what its worth.
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