The Mexican peso, inflation and an iconic hamburger: Big Mac Index

Mexico has the hamburger McDonald’s most expensive in Latin America, below Venezuela, Guatemala, Peru, Honduras and Colombia, according to the Big Mac Index, a review by The Economist magazine that compares the purchasing power of currencies from different countries.

Few products are available with almost the same amount of ingredients in as many parts of the world as the Big Mac, the iconic hamburger from the McDonald’s fast food chain. Its size, its ingredients and even the time you wait for it to be delivered are practically the same in any country, that’s why the magazine The Economist It has been using it for 37 years as a reference to observe the value of currencies between countries.

The exercise is based on the theory of purchasing power parity (PPP), and like any economic theory it has to be observed, analyzed and interpreted with nuances and, above all, under the lens of temporality.

In economics everything “depends” on many factors. The Big Mac Index it is just a clue to the level of value misalignment of the Mexican peso, the Costa Rican colon, the Russian ruble and every other currency in the world.

Big Mac and the value of coins

At the end of 2022, the Big Mac in Mexico had a price of 79 pesos, while in the United States it was 5.36 dollars. The conversion gives an implicit exchange rate of 14.7 pesos per dollar, but the official exchange rate in the market is around 18.8 pesos per dollar, according to inquiries from The Economist.

As the PPP theory says that the exchange rate must be determined by the goods and services that can be bought with money in each country, under this theory the Mexican peso has a value 21.8% lower than it should. Always, of course, following the route proposed by the London publication.

Additionally, a calculation is made adjusted to the GDP per capita of the countries. This is because it would be assumed that average prices in the poorest countries are lower because labor costs are lower. This adjustment allows you to see a more reasonable or more precise clue of the value that the currencies of each country should have.

With this adjustment, the Mexican peso would be only 6% lower in value than it should be.

hello inflation

Many economists around the world have already confessed: they underestimated beyond 2020 the inflationary effects as pressure on the global economy. Now, almost at the close of the first month of 2023, all pockets feel inflation, some more strongly than others.

The Big Mac and the historical series of the exercise of The Economist They are a simple way to understand how prices behave. Spoiler alert: always on the rise.

Inflation records in Mexico suggest that some of the ingredients in a classic hamburger have risen by double digits in just one year.

Let’s see December 2023:

• White bread cost 27.1% more than in December 2022.
• Mayonnaise and mustard, 22.2% more.
• Lettuce, 21.6% more.
• Yellow cheese, 13.9% more.
• Beef, 7.9% more.
• The tomato, 5.0% more.

These calculations were processed The Economist with figures from the National Consumer Price Index of the Inegi (National Institute of Statistic and Geography).

Inflation rates are also different in each country because the economic and social context and the policies to face the inflationary wave are different.

In Mexico, for example, food was the item that registered the strongest price increases. In European countries, gas, electricity and fuel are what have become more expensive.

Due to the direct link that exchange rates have with inflation and interest rates (as part of monetary policy), purchasing power is not enough to determine the value of a currency, but it can give clues.

At the end of 2022, Mexico closed with an inflation rate of 7.82% and an exchange rate close to 19 pesos per dollar. The peso is one of the emerging currencies that has recovered the most in value at the beginning of 2023, but the government program to alleviate inflation is still not enough.

The Economist’s Big Mac Index is only a theoretical exercise, but it offers an opportunity to analyze the behavior of currencies in different parts of the world and their purchasing power. It may not be as much fun as eating a hamburger, but it can help you understand why they cost what they do.

ana.garcia@eleconomista.mx