Dear Investor,
The essence of propaganda in communist regimes isn't to convert the populace to certain beliefs but rather to degrade them by presenting blatant lies.
The greater the deviation from truth, the more effective the deception is considered.
Picture this: You're at the grocery store, faced with empty shelves.
Hoping to whip up your go-to dish? Unfortunately, that's off the table—literally—since the key ingredients are nowhere to be found.
This means it's time to get creative with whatever you can find. Once you've made your selections and head back home to start cooking, you switch on the government-run radio.
There, you listen to a member of the politburo extolling the superiority of the nation's agricultural sector over those in capitalist countries.
You can’t help but think, “Really? Then where’s all the food?”
Why do I share this with you?
Because it mirrors the skepticism I feel towards the "official inflation data" we're often presented with.
There's a dissonance here that's hard to ignore.
We're witnessing our daily expenses climb at a pace that's hard to overlook, yet the so-called experts assure us that inflation has been historically nestled at 2-3% per year (before the post-pandemic rise).
My bills tell a different story.
The thing is, I can’t shake off the feeling that those inflation numbers are like being told there’s plenty of food when the shelves are empty.
The purported average of 2-3% annual inflation feels more like a fictional narrative than an accurate reflection of reality.
I don’t trust the official data.
But who can I trust?
Well, I like to quote Sherlock Holmes at this point:
“The world is full of obvious things, which nobody ever observes.”
What's an unconventional method to accurately gauge the hidden inflation rate, one that's been under our noses all along?
The solution would be to identify a universally standardized product, one whose characteristics have remained unchanged over time.
This product should be consistently priced across all states, reflecting a broad spectrum of our everyday expenditures.
Here's my proposition:
The Big Mac
Why the Big Mac?
The idea of using the price of a Big Mac as a proxy for inflation is interesting.
It relates to the Big Mac Index concept, which was introduced by The Economist in 1986 as a lighthearted way to measure purchasing power parity (PPP) between nations.
While the Big Mac Index is primarily used to compare the relative over- or undervaluation of currencies, the idea can be adapted to discuss its potential as an inflation measure within a single country.
Benefits
Uniformity: The Big Mac is a standardized product sold in numerous McDonald's restaurants worldwide, including widespread availability across different regions within a country. This standardization can provide a consistent basis for comparison over time.
Incorporates Various Economic Factors: The price of a Big Mac can reflect changes in various costs, including raw materials (like beef, bread, lettuce, and cheese), labor wages, rent, and energy costs. Therefore, changes in its price could indicate broader economic trends.
Accessibility and Understandability: The concept is easily understandable to the general public, making it an accessible measure for informal discussions on inflation and the cost of living.
In essence, this offers a reliable measure of the cost of essential goods we all require, steering clear of extravagances.
For instance, caviar, with its luxury branding, isn't suitable for comparison due to its propensity for significant price hikes.
Moreover, McDonald's MCD 0.00%↑ must maintain its competitiveness among other fast-food outlets, meaning any annual price adjustments are likely the bare minimum needed to remain viable without cutting into profits.
Excessive price increases risk driving customers to alternative dining options.
Now, let’s take a look at the facts.
I'll present the pricing data from before the unique inflationary period triggered by the pandemic—a rarity in the past twenty years—to offer a clearer understanding of standard inflation rates.
We'll delve into the price data spanning from 2001 to 2020.
Below, you'll find the Big Mac prices for these specific years:
2001
2020
In 2001, a Big Mac cost $2.29. By 2020, the price had risen to $4.59.
This represents a $2.30 increase, or 100%, equating to an annual growth rate of 3.73%.
It's important to recognize that this growth occurred during periods of "normal" inflation. However, the example does not take into account potential savings from labor costs or improvements in supply chain efficiency.
For a direct comparison, the production process would need to remain unchanged. Given McDonald’s commitment to optimizing its operations, it's reasonable to infer that, in a true like-for-like comparison, the annual price increase might well exceed 4%.
And that’s during an era of “normal” 2-3% inflation (according to experts).
A few basis points difference may not sound like a lot, until the factor in the compounding effect year after year.
If we factor in the price increases of the last 4 years we get a much different picture.
As per Statista, the price of a Big Mac in January 2024 stood at $5.59.
This indicates an annual price increase of 4.04% from 2001 to 2024, before accounting for production efficiencies.
In a direct comparison, we could anticipate a slightly higher rate due to these adjustments.
According to the Big Mac prices a rate of +4% can be viewed as the minimum inflation for essential items in the last 23 years. However, most people's expenses extend beyond just necessities.
We indulge in new clothes, dine out, enjoy cakes in cafes occasionally, purchase new vehicles, travel, and undertake home repairs, among other activities.
The costs associated with these discretionary expenses have escalated significantly post-pandemic, surpassing the inflation of basic necessities by a wide margin.
An additional point to consider
Examining basic staples like flour, sugar, salt, and potatoes, it's crucial to recognize that many supermarket chains offer these items at break-even prices or even slight losses to attract shoppers, compensating for these discounts with higher markups on other products, such as snacks.
This strategy, however, isn't viable for suppliers to fast-food chains like McDonald's, where a potato farmer must turn a profit to sustain their business.
This discrepancy often goes overlooked in the calculation of official inflation data.
Therefore I think, that the Big Mac serves as a reliable proxy for understanding the minimal price inflation that affects us all.
So, the next time a politician or the Federal Reserve Chairman asserts that "inflation is under control," it's wise to disregard such claims and instead focus on the facts that are reflected in your everyday expenses.
I hope you learned something today.
Until the next issue. 👋
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Disclaimer: This analysis is not advice to buy or sell this or any stock; it is just pointing out an objective observation of unique patterns that developed from my research. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice.
Well put!!! I have stopped believing the government and the media fora long time now!!
If the Federal Reserve (and any other central bank) were properly doing its job, the inflation rate would be 0%. The fact that it doesn't work out that way shows that they are a collective failure.
I just don't know whether the most important word is "collective" or "failure".