The original price comparison index

Updated: Nov 6, 2018



Price comparison websites have grown significantly in number and popularity over the past

decade and now some of these ‘go compare’ sites are household names especially here in

the UK. For sure these can prove an invaluable consumer tool for everything from car

insurance to holidays, utility bills and beyond.


However, long before these all sprang to life with the advent of the internet there was a

much older price comparison barometer that was pertinent to the currency markets. I am

sure many of you have heard of this, so when I mention it here, it may not come as much of

a surprise.


It’s called the ‘Big Mac index’. Yes, that’s right its all about the price of a burger, or more

rather the relative price of it in various countries. It was devised by the Economist more

than 30years ago as a light hearted way to try and assess the relative value of currencies. So,

its been around a long time and certainly long before the internet and all those comparison

websites.


Now, some might consider this, at best a tenuous gauge of trying to assess whether or not a

currency is over or undervalued in relative terms as judged by the price of a burger. Well,

yes perhaps it is, and not necessarily a price variable that exists due to any exchange rate

anomaly either, but still worth looking at all the same I think.


One advantage of using a Big Mac for this exercise is because of its consistency in terms of

taste, content, size and quality. Over the years I have eaten a Big Mac in many places

around the globe, from Hiroshima to Hawaii, and I can honestly say they were all pretty

much the same, if not at all memorable for any other reason.


Leaving that aside, I decided to check this out over the weekend to see if much had changed

since I last paid any attention to it, which as it happens was some years back. What I found

was actually quite interesting.


According to my research a Big Mac in New York currently costs around $5.50 whereas here

in the UK it’s priced at approximately £3.19. I had to troll through a lot of websites and mull

all the variables (prices do vary a lot between towns and states both here and in the US) to

try and arrive at what I think is the true median price in both countries.


So, if this is anywhere near correct, in order to extract fair value both sides of the Atlantic it

would imply a GBUSD rate of $1.7200. So, on that assumption, if nothing else, it does at

least provide a good indication of just how far the pound has weakened over the past 3

years. Well, according to this Big Mac index; right now it’s some 24% below fair value with

the dollar. Personally speaking, I don’t think that far off the mark.


However, in Japan a Big Mac will set you back just Y390 which at the current exchange rate

(113.20) is only $3.45 which probably says more about the impact of zero inflation there for

the more than 2 decades than it does about the USDJPY being grossly overvalued.


When looking at both these examples, the most interesting thing for me is how they strip

out in terms of the pound versus the JPY. At the current GBPJPY rate of around 145, a Big

Mac is still surprisingly cheap (unlike in the US) for UK tourists visiting the land of the rising

sun. On the other hand, were the GBPJPY to drop to 122 it would then cost the same.


Looking beyond the UK, US and Japan perhaps its worth noting that the most expensive

place in the world to buy a Big Mac is Switzerland where one will set you back $6.50- a good

indication perhaps of just how expensive the CHF currency is against the other three?


That all said, please don’t take this for anything other than what it is- a light hearted and

diverting exercise in the relative value of hamburgers- or is it?


Finally, on a totally different note this morning; it could be quite a week for the dollar this

week with the US mid-term elections taking place tomorrow. Quite simply any outcome that

leads to a political impasse won’t do the US currency any favours whereas a further

endorsement of the president and the GOP probably will. Too close to call by all accounts it

seems.


Key data events due this week

06/11- 3.30am- Reserve Bank of Australia monetary policy decision

(Benchmark rate expected to remain unchanged at 1.5%)

06/11- US Mid term elections- results due sometime AM GMT on 07/11

07/11- 8.00pm- Reserve Bank of New Zealand monetary policy decision

(Benchmark rate expected to remain unchanged at 1.75%)

08/11- 7pm-US FOMC monetary policy decision

(No changes expected and no press conference scheduled)

09/11- UK Q3 GDP revision

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