The Big Mac Index: More than just a burger price
As the summer heat intensifies, so does debate over currency strength. Even a humble burger offers fresh perspective. In-July, The Economist’s Big Mac Index showed the US dollar still commanding a premium in “burger-purchasing power,” despite a 10 percent slide in its market value since January. Rather than fixating on which currencies sit at the top or bottom of the table, today’s focus is on how the index as well as broader purchasing-power measures have moved, and what that means for markets.
Over the past six months, many “undervalued” currencies have stayed cheap in burger terms. Take Taiwan: its currency remains about 60 percent undervalued against the dollar, little changed since we discussed last month, even as local Big Mac prices stayed flat while US prices rose from $5.79 to $6.01. In practical terms, this means the real effective exchange rate of the dollar has lost its bite, reflecting a modest improvement in US competitiveness but also rising domestic prices.
For equity markets, these currency dynamics matter. A persistently expensive dollar can weigh on US exports and multinational earnings, helping explain why the S&P 500’s recent modest correction has coincided with rallies in European and Asian indices. Conversely, bond markets hinge on real exchange-rate risks: as currencies swing less in burger terms, real-yield differentials become more entrenched. With the US real broad dollar index falling, US nominal yields remain elevated, but real yields have crept up, compressing bond-equity correlations and fuelling volatility in duration-sensitive sectors.
A few lessons can be drawn from this dynamic. First, PPP divergences can presage shifts in capital flows: investors often chase yields in currencies perceived as undervalued, magnifying local rate cycles. Second, when Big Mac prices diverge materially from PPP-implied fair value, it often reflects underlying inflation differences, which is another warning sign for bond allocation. Finally, the most mispriced currencies tend to coincide with markets where real exchange-rate volatility is highest, suggesting situations where flexible hedging in global bond portfolios might be appropriate.
Even if it has to be taken with an extra pinch of salt, the Big Mac Index remains a light-hearted yet powerful reminder to take a global, diversified approach: blend local yield opportunities with disciplined currency management and keep a close eye on the “burger gap” to gauge where true competitiveness lies.
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