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Big Mac inflation differs from CPI

Inflation is measured by changes in the Consumer Price Index published by the Bureau of Labor Statistics.

Our Social Security, cost of living adjustments, and many other things are tied to it. Does the CPI do a good job of measuring inflation?

Well, that’s debatable.

Back in my undergraduate days, I learned that inflation was measured by changes in the cost to a consumer of a fixed basket of goods and services from one period to the next.

So, an increase of 5% in the CPI over one year means that inflation was 5% for that year. Not exactly.

The BLS makes two adjustments to the basket, which tend to understate the increase in your cost of living.

First, they substitute. When the price of beef increases, for example, they assume you eat more chicken instead. Second, they factor in quality improvements (called hedonics) as lowering the price of a product — even though the price you paid may have gone up.

Automobiles are better than they were 20 years ago, but they don’t cost less when you buy one. The same is true of telephone services, telephones, etc. Hedonics lowers the reported CPI.

In 1986, Pam Woodall of the Economist Magazine invented the Big Mac Index to compare the cost of living around the world and over time — as you can buy a Big Mac just about everywhere. This index is an interesting proxy for increases in your cost of living. Consider what goes into a Big Mac: two all-beef patties, special sauce, lettuce, cheese, pickles, onions, on a sesame seed bun, etc.

Further, consider what else the price of a Big Mac includes: McDonald’s store real estate, property taxes, wages, employee benefits, ingredient transportation costs, and more.

A Big Mac reflects many of the costs you incur in your everyday life. So, the index may better reflect the impact of inflation on your life.

Since inception, the Big Mac Index has increased much faster than the CPI. In just the last 30 years (1992-2021), the CPI inflation was 91% or about 3% annually, but the Big Mac Index increased 158% or 5.2% annually.

That’s a big difference. If your wages, COLA, or Social Security are tied to CPI, you lose ground every year. And it gets worse the longer it persists.

A 3% inflation rate doubles your cost of living in 24 years, but 5.2% rate doubles it in less than 14. The longer it goes, the worse it gets for you.

I don’t suggest anything nefarious in the CPI calculation by BLS. There are good arguments for substitution and hedonics. People do substitute, and products improve.

Unfortunately, you pay your bills in a Big Mac Index world, not a CPI world. So, if you feel you are losing ground, you may be — and now you know why.

Christopher Gable of Altoona is an occasional contributor to the Mirror’s Opinion page.

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