Home Trading Inflation. Big Mac Index.

Inflation. Big Mac Index.

by Admin

To measure the purchasing power of the equivalent of $50 in different countries of the world, an unusual index is used – the Big Mac Index. For example, in Sweden you can buy only 8 Bigmacs for this money, while in India the figure is impressive – as many as 30. Russia is somewhere in the middle, with an index of 19 Bigmacs for $50.

Familiar U.S. dollars and national currency exchange rates are not as reliable for accurately determining the purchasing power of U.S. currency. The Big Mac has seemingly always remained the same – the symbolic representative of fast food.

Inflation. Big Mac Index.

However, in fact, everything in this world is subject to inflation, even the Big Mac. In 1980, it cost only 50 cents, and what’s more, it was 40% larger. Between then and 2020, the price of a bigmac has gone from $0.50 to $5.65, and its weight has decreased by 40%.

Doing some simple calculations reveals the dollar inflation over the last 40 years. So, 100 grams of a Big Mac now costs 15.82 times as much, or a 1582% increase, which equates to 39% annualized. That’s real inflation – almost.

Diving into history, in 1972, when the bigmac came out, its patty was bigger and made of real meat. Now there are no such guarantees, especially since McDonald’s is procuring bloggers for demonstration tours of local production facilities. Sounds suspicious, doesn’t it?

Hence, it’s not a good idea to consider the bigmac as a stable currency, immune to inflation and manipulation. Thus, another 20-40% can be added to the 39% annual inflation rate. The final annual dollar inflation rate for the bigmac index would be 56%.

If your portfolio earns you less than 56% per year, you are quietly impoverished. Maybe gold will save the day? No, since its price has only risen 332% over the same 40 years. But for the same amount of gold in 1980 you could buy 5 bigmacs, which were bigger and tastier than they are now. Now for the same amount of gold there is enough for only one, and not even that big and tasty.

So in gold, according to the Bigmac index, you will get a negative return of 12% per annum. What asset has been able to preserve the purchasing power of your money over the past decades? Obviously, the answer is Bitcoin.

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