Are our inflation figures fudged?

The economist magazine compares Big Mac inflation to officially reported country inflation over the last ten years. The aim of their article is to suggest that perhaps China and Argentina have been fudging their inflation figures. However, my attention was drawn to South Africa right near the top of the chart.

This suggests that our official CPI inflation has been understated by approximately 2% over the last ten years. From conversations I’ve had there would appear to be plenty of popular support for this notion.

I’m still not convinced.

The calculation of inflation figures has been closely  watched by economists and asset managers trying to understand what the future holds for monetary policy, earnings growth and returns on inflation-linked bonds. While there have been errors in the calculation, the experts in this area have not been the ones criticising the overall methodology or results (apart from these specific errors).

So why does this 2% differential exist? I have some ideas:

  • The components of a Big Mac are not representative of the entire economy. Perhaps (and I haven’t checked) food price and wage inflation (two components I’d guess at being significant inputs into a Big Mag) may have been above average CPI.
  • Our currency has had wild swings over the last ten years, dramatically affecting the cost of imported goods and services. This won’t be reflected in the locally made from mostly locally produced ingredients Big Mac.
  • Consumer electronics, computers, office equipment etc. have all benefitted from cost reductions over this period.
  • The differentials for several other countries are significantly wider, suggesting a high variance between official inflation and Big Mac inflation. In other words, a 2% differential may not be significantly different from a 0% differential.

Argentina, on the other hand, with a 9% differential, is another story.

Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.

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3 Comments

  1. It’s possible that demand for Big Macs have increased with time.

    Surely it can be argued the addition of new McDonald franchises has made the brand more public and possibly more popular. Many more branches are also open 24/7.

    The (possible) increased demand from the publicity and higher prices required to finance a 24/7 stores could be a reason for the difference in increases.

    1. McDonald’s can’t have been in SA much more than 10 years – so it’s entirely plausible that pricing structures will have been tweaked over time. In short, I think you have a point.

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