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.